Thursday, September 30, 2010

How Obama Can Fix The US Economy

¹²How Obama Can Fix The Us Economy

Some advice on filling that economic-adviser job at the White House: Think big, get tough in the global economy, and invest in America's future.
By Jim Jubak | 30 September 2010

I want to be prepared for the Big Question: What would you do to turn around the U.S. economy? I've quickly worked up this draft in answer.

Change The Way We Define The Problem

No more baby steps. You don't fix a crisis this big by tinkering around the edges. I had this drummed into me in a business school class in 1984. My assignment was to come up with a budget to fix the New York City economy. The professor read my carefully prepared solution and laughed. Well, actually he guffawed. You think you can fix this budget, he asked, by closing firehouses?

Now I'm looking at a $14 trillion U.S. economy with an unemployment rate pushing 10%. Tinkering with the tax code or offering a FICA tax holiday isn't going to fix this crisis. Admit that as bad as things are now, they weren't exactly swell before the crisis.

Incomes for the average family have been stagnant for the past 30 years— especially if you take out extra dollars that come from having more moms in the work force and having one or both parents work extra and/or temporary jobs. For some workers— blue-collar industrial workers and workers without high school degrees— the Great Recession began not in 2007 but in the 1980s and hasn't ever ended. Even the great job-creation surge in the Clinton years doesn't look like the best of times when you consider the kinds of work created— lower-paying, predominantly service-industry jobs— to replace the higher-paying manufacturing jobs that had been lost.

Let's admit that the ideas now getting recycled in the midterm election campaigns from both parties haven't prevented or reversed that long income stagnation— and they aren't likely to. It's not because tax cuts, tax increases, education credits, No Child Left Behind, spending cuts, spending increases and the other patent medicines peddled by politicians don't have any effect, but because they're too narrowly focused to end a 30-year problem. As Larry Summers would say— if we transplanted James Carville's brain into the Harvard economist's body (and that would sure be fun)— "It's the global economy, stupid."

Fixes that ignore the global economy are going to be too small or completely misguided. And those of us who live in the United States will have to give up some of our economic illusions. (Come on, you can do it. It's not nearly as painful as giving up "Mad Men.")

For example, it's time to concede that when it comes to exports, the U.S. has become essentially a commodity economy. We export corn, coal and scrap paper, and we import TVs, cars and solar cells. Export our way out of this mess with an extra paragraph here or there in our trade treaties? Oh, puleez!

Play Hardball (Or Insert Your Own Sports Cliché Here)

Let me give you an example ripped from the headlines, as we say here in New York. China has slapped quotas on its exports of rare-earth minerals essential for building hybrid cars, wind turbines, amplifiers for optical cable communications networks and the newest fluorescent lights. If companies want to build these products and are worried about their sources of these raw materials, they can make sure they have plenty to work with quite simply— by moving production to China.

And we're going to fight back against this sort of globalism by creating a $30 billion loan fund for small businesses or lowering mortgage rates (by having the Federal Reserve run up its balance sheet)? It's war out there in the global economy, and the battle is to secure the world's scarcest commodity: good jobs. That's way better than real war, let me remind you. But to stand a chance in this war, the U.S. has got to at least match the firepower of the other countries.

In this competitive economic war, we can't afford to have all the battles fought on our turf; we can't always be on the defensive. European and Chinese makers of high-speed trains are going to fight it out to see who gets billions in U.S. taxpayer money to build a high-speed line in California. Where's General Electric (GE) in that competition? And if we don't have the team that can play in the big leagues in high-speed trains, how about we go after China's market for freight cars or freight locomotives?

It's not like our stuff can't compete with their stuff. In many cases, cheap financing is the only thing they've got that we don't. (And it's hard to believe that it isn't cheaper to provide low-interest taxpayer financing to U.S. companies than it is to spend taxpayer money saving a gutted industrial shell from bankruptcy.)

If moving from a defensive crouch to offense means using government resources to create competitive industries from scratch, so be it. It's cheaper in the long run than paying for years of unemployment and the social havoc that would cause. It's insane that the U.S. doesn't have a domestic source of rare-earth minerals and that we're willing to give anybody in the world control of something essential to 21st-century technology.

Think big? No, bigger!

So the world's companies want our metallurgical coal? Fine. Have them build steel mills in Pennsylvania and West Virginia and more car plants in Alabama. The world's companies want our corn? Fine. Make their home countries tear down the trade barriers that keep U.S. chickens out of Russia and other nations. (Granted, it might help if we promised not to dip the birds in bleach.)

Countries such as France and China have official national champions— companies the governments back to drive their domestic economies and the countries' exports overseas. The U.S. has de facto national champions. They haven't been awarded that title by some bureaucrat but have earned it in the actual marketplace. Intel (INTC), for example, is one.

But our de facto national champions often don't get much actual support from Washington, although we do give hefty tax breaks to last-century industries such as oil. So Intel winds up building a chip plant in Vietnam because that country supplies cheap land and labor. [[And looks the other way when it comes to polution!: normxxx]] With government incentives, the U.S. could match that. And don't say that isn't our system. Alabama, South Carolina and Tennessee are perfectly comfortable paying BMW (BAMXF) or Toyota Motor (TM) to build plants in their states.

Get Over Our Bad Case Of 'Not Invented Here'

Maybe once upon a time we were justified in looking down at other countries' technology or to make jokes about their claims to have invented the telephone. But if that superiority was ever justified (and I'll bet my Marie Curie fan club ring that it wasn't), it sure isn't now. We need to stop exporting technology and to start importing some, too.

I've got no problem with Boeing (BA) subcontracting work to Chinese companies and giving a boost to China's aircraft industry through legal or extralegal technology transfer. But how about some of it flowing the other way? How about a U.S. company getting its hands on the technology to build a high-speed train as part of any contract in California? How about getting ArcelorMittal (MT) to transfer its 'best practices' to U.S. steel company partners when it builds a plant in the U.S.?

We need to recognize that you don't win in this global economy playing with out-of-date infrastructure. Our airports, highways, ports and railroads aren't up to the standards of the toughest of our competitors. And then there's electronic technology, where our wireless Internet network increasingly lags. Countries, especially countries such as Singapore that don't have huge natural advantages, spend to create infrastructure advantages. We let ours decay because it 'costs too much' money.

In the short run, the expense is certainly considerable, although it could be spread over years or decades by a mechanism such as a government-seeded infrastructure bank. (One of the great ironies of the moment is that to find good infrastructure investments, I have to send my money overseas.) In the long term, it is again cheaper than running a country in permanent recession.

And let's upgrade our human capital, too. If many of the workers feeling the brunt of this 30-year stagnation are those without high school diplomas, let's make sure that the next generation has more education and the next generation even more. And let's make sure that it's education that's appropriate to the new global economy.

Raising standards so that every kid getting out of high school can do 12th-grade math and write good (or is it "gooder"?) English is a decent goal, but it won't get the job done in the long run. We can't learn only English and expect the rest of the world will, too. We can't say we've got a shortage of engineers, then turn out kids who can't do trigonometry. It will take a long, tough battle. But again it's cheaper to fight the battle than to pay the long-term cost of losing it.

We should recognize that there's a potentially nasty strain of xenophobia built into this idea of global economic competition, and we should fight it actively by expanding all existing programs that get Americans acquainted with— or, better yet, immersed in— other cultures. If you play any competitive sport, you know it's possible to play to defeat your opponent with all your might and still go out for a beer together afterward. And it's fun.

Let's Fix Washington, Too

Your response to this is likely to be, "We can never get anything like that through Washington." (And I do recognize that another possible response is, "Thank goodness, nothing like that would ever get through Washington".)

I refuse to accept that. If the current politicians won't act, dump 'em. It may take years to create a responsive government. But if it took 30 years to get the problem to this stage, what's another 30 years fixing it?

And as long as we're thinking big, doesn't it strike you as hopelessly antiquated that we elect representatives to vote our 'will' (ha!) in the age of social networks and online collaboration? Why not do away with the current budget system entirely and let Americans vote online for the programs they want to fund? Maybe within a limit of no more than a 20% change from one year to the next, to ensure some kind of continuity? (So it would only take five years to kill the kind of boondoggles that now live on forever.)

And I'd suggest a simple rule: Adjusted for the economic cycle: we couldn't spend more than our income. Of course, to do that we'd need to actually implement a capital budget in Washington. Or how about something like "American Idol" in which Washington department heads competed on TV for our money? Or "Budget Survivor," in which the worst government programs could get voted off the island (or out of D.C.).

I'd watch, especially if they had tiki torches.

Looking at my plan, I can't understand why the White House hasn't called. Come on, phone, ring!



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Wednesday, September 29, 2010

Investing For The Next 5 Years

¹²Investing For The Next 5 Years

By Larry Laborde | 27 September 2010

Even though perhaps as many as 20% of the working age people in the US are unemployed, 80% are still working. Young people fall in love, babies are born and the inevitable funeral awaits us all at the end of our earthly journey. But what a joy life can be if you simply make the right choices and choose to enjoy them. One of my favorite sayings is happiness is not about getting what you want but simply wanting what you get.

Many people are uncertain about just exactly how to invest in these troubled economic times. Private capital seems to be fleeing the stock market as it not only seems to have gone nowhere this last decade but has even lost ground when considering the steady erosion effects of inflation as it devalues our dollars. Even though we may hold the same amount of dollars in our accounts at the end of the decade as when we crossed over into the year 2000 those dollars have shrunk quite a bit when considering their purchasing power.

Many of those dollars that have left the stock market have rushed into the supposed safety of bonds. With the falling revenues and increasing expenditures of municipalities and state governments (especially in lavish defined benefit pension funds) default cannot be far off. US bonds are not much better but will last a bit longer before the inevitable default occurs; either through outright default or the slow painful type that pays off in 'future' dollars that buy less and less than the past dollars that purchased those same bonds.

Bonds may realize a further gain if the interest rates drop further— but how much lower can they go? If the interest rates go up (more likely than going lower) the value of [[a pre-mature: normxxx]] bond will drop. Bonds just do not look as good going forward as they have in the past.

Most investment advisors will tell you that you should only invest in stocks and bonds. Invest heavy in stocks when young and change the mix to a heavier allocation into bonds as you get older. This is looking to be a less and less promising strategy as we go forward into this economic storm.

There are 7 classes of investments out there; stocks, bonds [[and other 'fixed income' investments: normxxx]], cash [[and cash 'equivalents': normxxx]], precious metals, commodities, collectibles, and income-producing real estate. Real estate still seems like it has lower to go (especially commercial real estate). Cash is not bad, but there is a cost to hold it as inflation exceeds ordinary interest right now. Commodities are becoming more and more popular [[altogether too popular: normxxx]]. People had made fortunes in agricultural commodities as of late due to the Russian drought, a growing world population, and third world prosperity that is hungry for a better diet. Precious metals have been in a bull market (when priced in fiat currency) for the last decade and will probably continue to be a good investment going into the next decade, as they are increasingly recognized as the premier form of cash. [[But beware of increased, stomach-churning volatility going forward.: normxxx]]

Economic storms are not about smooth sailing or even about passing other boats in the race. They are about survival. Storm sails and sea anchors are not about speed. They are about surviving through the storm, then taking stock of the horizon afterwards and then adjusting our sails and continuing onward.

Preserving our capital in this economic storm should be our number one priority. Making money should be secondary. The time for great profits will come a bit later after the storm. However, if your boat has capsized and sunk then you are out of the race, and when the storm clouds clear and the sun does reappear, you will be unable to take advantage of fair winds and favorable seas.

So how exactly do we rig for storm? Only invest in what you understand. If you do not understand the business plan of a company you are invested in then read up on it. If it does not make sense to you then get out. If the prospectus looks like an old Sears and Roebuck mail order catalogue then simply pass on that one. Charlie Munger said that at Berkshire they had 3 buckets; good investments, bad investments and just too hard to understand investments.

[[Look for "World Dominator" stocks [1]; ie, whose customer base is geographically distributed, which seems to have an assured future— including revenue growth during "up" periods and no significant loss during "down" periods, which is providing an essential/needed product/service (which is not likely to become obsolete in the foreseeable future), has an investor friendly, innovative management (this may be hard to judge; but use the opinions of several gurus whose advice you have come to respect; in particular, look for the capacity to 'expand' its current franchise into seemingly unrelated or tangentially related fields— such as google or microsoft— and/or can quickly match or usually anticipates the new products of competitors— such as intel), has a high 'moat' against new competitors, a very consistent profit margin (preferrably over several years), pays a reasonable dividend (in-line with industry) with a good history of ever increasing dividends (very few or no "bad" years), etc.

Remember to be especially on the lookout for 'future' world dominators, ie, medium-sized companies with seemingly unlimited potential to grow, eg, in the attributes described for the WDs (most such are relatively 'boring' companies, like Wal-Mart or Exxon; Microsoft and Intel are probably two of the most 'exciting' stocks in this group, but are not any better than the rest).
: normxxx]]

Even the best of investments should be shied away from if they are too hard to understand. Stocks are not altogether poor investments if you are a good picker and are willing to do your homework, but by and large most are overpriced right now. When P/E ratios get back around 5 to 7 and good dividends are being paid out then it will be time to re-enter the market with the capital that we saved from the storm.

Lazy stock investors will have a hard time surviving this storm. Municipal bonds should only be invested in when you have knowledge of the individual municipality and feel comfortable with their fiscal position. (I know of few to none right now.)

US government bonds are simply a bet that Washington DC has the right answers and will guide us through this mess with responsible policies (It is hard to type and laugh at the same time.) If you feel that you must invest in bonds then try only short-term bonds or long term bonds that mature in 1 year or less. Just remember to be out of them at least one day before they default.

There are simply no shortcuts in this process. You simply have to grow up and do your homework on your investments. My father used to lament that it is hard to make money but it is even harder to invest it wisely enough to hang onto it. I now know exactly what he was talking about.

I have always recommended a 10% investment in precious metals (metals that you own outright and hold in your hands) as portfolio insurance. In these uncertain times a 20 to 25% allocation is not too much. Don't look to others to take care of you.

Social security will probably not be around for those of you under 45 right now. Social Security has just gone into deficit spending 6 years ahead of schedule. It will be 'means tested', real payments will be reduced through inflation [[the current COLA will be discontinued or discounted: normxxx]], and the retirement age will slowly creep up to where it seems many people will never get there at all (sort of like the carrot on a stick).

Defined benefit plans will go bankrupt after payments are reduced through inflation. Few such plans are fully funded these days, and funding will only get worse going into this storm. Cash, while expensive to hold, is still not bad and probably deserves a 20 to 25% allocation right now. Just make sure your cash is held in the right place.

Most money market funds are paying close to zero and some even 'broke the buck' back in 2008. Many more may head below $1/share as interest payments drop and fees are subtracted. Stay away from the large New York banks as they are all the walking dead. While it is true that DC may bail them out forever it is just possible that things may not work out so well for them into the future.

I also consider it morally reprehensible to deal with them at all. Look at local banks that have a strong bank rating. Also consider credit unions. Just do not keep over $100,000 in any one institution. Spread it around a bit and hedge your bets.

There will be bargains in the future when the storm passes and you must have wealth to be able to play. The stock market will be a bourse with more sellers than buyers as the largest generational demographic enters retirement age and starts cashing in on their investments to live during their old age. Most stocks in the US are overpriced as their P/E ratios are too high and the dividends are non-existent.

Capital appreciation is the only way to profit with most stocks nowadays and that is a long shot with most of them in today's storm. Stock markets in the third world or in the emerging markets will show great promise after the storm, however, they could prove a bit risky just now. Start a list of possible investments for later. Research them and follow their progress through the storm.

It is a bit early to invest but it is never too early to start your watch list with target purchase prices. (This is why you need the cash.) Good agricultural real estate and solid commercial real estate will be great buys at the bottom so start looking around at targets to purchase in the future. Finally, consider opening a family bank or your own venture capital investment company.

Instead of investing in Dow Jones stock consider investing in your nephew, your grandson or another bright young relative. Unemployment is extremely high among the younger generation. Encourage them to learn a trade such as a plumber, electrician, machinist, painter, landscaper or commercial driver. Anything that interests them will work.

If they cannot find a job then encourage them to create their own and start a business. Make a small loan and then mentor them in their business ventures. Help with insurance selection, cash flow, employee relations; all the things that you have learned for the last 30 years in business. Help make them a success. See what the bank would charge for a small business loan and then make that same loan for a couple of points less. The return on your capital will be much greater than the bank is paying. You can control the risk by mentoring them.

Many people complain that the banks are not lending. They are also complaining that the banks are not paying interest on savings. Well just cut them out and make those loans directly through your family bank. It will take honest talk between both parties as well as a little legal work to have everything perfectly understood up front. The results can be amazing for both parties.

Housing will be another area where there will be much more pain to come. Home mortgages will be harder to get and harder to service. While I think we will see inflation in things we need and import such as food and energy, I think we will see deflation in assets such as houses and luxury items that we can do without. I believe we will see 'intergenerational homes' more and more in the coming years.

There is a great opportunity for building contractors to convert the sprawling 5 bedroom ranch house into a modern intergenerational home for the coming decade. A remodel that offers 3 master bedroom suites each with private bath, bedroom and sitting room along with common rooms such as common kitchen, den, dining and laundry rooms will create a powerful economic family unit that will still allow for a certain amount of privacy. Grandparents with their own mini apartment or suite can provide childcare as well as transmit family values to the next generation.

Older adults still working can provide economic stability and allow younger adult children to take risks and open a new business. The key to this new family arrangement is converting the 5 bedroom ranch into a family home with 3 master suites or apartments allowing for private spaces for each generation. Kitchen, laundry and dining rooms are public spaces [[but need to be rebuilt as 'shareable': normxxx]] whereas the master suites are private spaces.

This will allow for families to live together in harmony. The younger generation has been hardest hit in this storm. For those that do not have the luxury of a conventional job, the new economy will work best if they seek several streams of income through contract work at different part time jobs. All three generations working together will allow for flexibility and many different income streams to support the home in case one or more are lost.

Debt will be a killer in the future. If you can pay off your home, credit cards and car then do so. Try to operate with cash as much as possible or at least pay off your credit card every month. Live below your means and save all you can every month. Make sure you have 6 months of living expenses in savings (preferably in a credit union). Also try to have an emergency fund of a few thousand dollars at home or close by.

In these economic times family and neighbors will be more important than ever before. As government assistance and services disappear in this storm, it will be family and neighbors that pull each other through.

Capital Controls Eyed; Gold The Final Refuge?

¹²Capital Controls Eyed As Global Currency Wars Escalate

Stimulus leaking out of the West's stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies.
By Ambrose Evans-Pritchard | 29 September 2010

Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows. Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be "direct capital controls", the bank warned. Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict.

"It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said ."I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up."
Brazil's finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a "currency war" as funds flood the local bond market to take advantage of yields of 11%, vastly higher than anything on offer in the West. "We're in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies," he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.

Brazil's real has been one of the world's strongest currencies over the past two years, aggravating a current account deficit nearing 2.5% of GDP. The overvalued exchange rate endangers Brazil's industry, especially companies that compete with Chinese imports. The real has appreciated to 1.7 to the dollar from 2.6 in late 2008, and by almost the same amount against China's yuan.

"Everybody is worried that global growth is fading and they are trying to use exchange rates to protect exports. Brazil has watched as the Asians intervened and feels it can't stand by," said Ian Stannard, a currency expert at BNP Paribas. Brazil has used taxes to slow the capital inflows but the allure of super-yields and the country's status as a grain, iron ore, and commodity powerhouse have proved irresistible. It is a textbook case of the "resources curse" that can afflict commodity producers.

A $67bn share issue by Petrobras has been a fresh magnet for funds, forcing the central bank to buy an estimated $1bn of foreign bonds each day over the past two weeks. Such action is hard to "sterilise" and it can fuel inflation. Japan has begun intervening to stop the yen appreciating to heartburn levels for Toyota, Sharp, Sony and other exporters. A strong yen risks tipping the country deeper into deflation.

Switzerland spent 80bn francs in one month to stem capital flight from the euro, only to be defeated by the force of the exchange markets, leaving its central bank nursing huge losses. Stephen Lewis from Monument Securities said the Fed is playing a risky game toying with more QE. There are already signs of investor flight into commodities. The danger is a repeat of the spike in 2008, which was a contributory cause of the Great Recession. "Further QE at this point may prove self-defeating," he said.

Meanwhile, Dominique Strauss-Kahn, managing director of the International Monetary Fund, tried to play down the fears of a currency war, saying he did not think there was "a big risk" despite "what has been written".


Gold Is The Final Refuge Against Universal Currency Debasement

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.
By Ambrose Evans-Pritchard | 26 September 2010

"We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself," said former Fed chair Paul Volcker in Chris Whalen's new book Inflated: How Money and Debt Built the American Dream. "It is a serious question. We are no longer talking about a single country having a big depression but the entire world."
The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month. Premier Wen Jiabao confesses that China's ability to "maintain social order" depends on a suppressed currency. A 20% revaluation would be unbearable. "I can't imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs," he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing "remedial tariffs" on Chinese goods deemed to be receiving "benefit" from an unduly weak currency. Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing's record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure a yuan-yen advantage and perhaps to damage Japan's industry at a time of escalating strategic tensions in the Pacific region.

Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40% of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

The exception is Germany, which protects its surplus ($179bn, or 5.2% of GDP) by means of an undervalued exchange rate within EMU. The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were— by deficits— the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all.

East Asia's surplus states seem structurally incapable of compensating for austerity in the West, whether because of the Confucian saving ethic, or the habits of mercantilist practice or, in China's case, by the lack of a welfare net. Their export models rely on the willingness of Anglo-PIGS to bankrupt themselves. So we have an early 1930s world where surplus states are hoarding money, instead of recycling it.

A solution of sorts in the Great Depression was for each deficit country to devalue, breaking out of the trap (then enforced by the Gold Standard). This turned the deflation tables on the surplus powers— France and the US from 1929-1931— forcing them to reflate as well (the US in 1933) or collapse (France in 1936). Contrary to myth, beggar-thy-neighbour policy was the global cure.

A variant of this may now occur. If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.

The latest Fed minutes are remarkable. They add a new doctrine, that a fresh monetary blitz— or QE2— will be used to stop inflation falling much below 1.5%. Surely the Fed has not become so reckless that it really aims to use emergency measures to create inflation, rather preventing deflation? This must be a cover-story. Ben Bernanke's real purpose— as he aired in his November 2002 speech on deflation— is to weaken the dollar.

If so, he has succeeded. The Swiss franc smashed through parity last week as investors digested the message. But the swissie is an over-rated refuge. The franc cannot go much further without destabilizing Switzerland itself.

Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries.

This is not to say that gold has any particular "intrinsic value". It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain's Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90% of its value— hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain's gold. It has risen five-fold since then.

We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return. The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed "never to do" just months ago; and the Bank of Japan has just carried out two trillion yen of "unsterilized" intervention.

Of course, gold can go higher.

Not Yet Out Of The Woods

¹²Not Yet Out Of The Woods

By John P. Hussman, Ph.D. | 29 September 2010
All rights reserved and actively enforced.

In its release, the National Bureau of Economic Research noted that it "places particular emphasis on measures that refer to the total economy rather than to particular sectors". These include "a measure of monthly GDP that has been developed by the private forecasting firm Macroeconomic Advisers," and "measures of monthly GDP and GDI that have been developed by two members of the committee in independent research (James Stock and Mark Watson)". The Committee generously provides downloadable data on these measures, which make for fascinating research. In particular, a review of that data suggests that the NBER may have to deal with the prospect of a "future downturn of the economy" much sooner than any of us would like.

Below, I've combined the long-term Stock and Watson data with the ECRI Weekly Leading Index growth rate to give a picture of how fluctuations in these measures have correlated with past recessions (shaded orange) identified by the NBER. Given the upward spike in growth that we observed in mid-2009, the choice of a June 2009 turning point is consistent with historical precedent. The Committee typically dates the beginning of a recovery at the point where the growth rates of underlying measures of economic growth clearly spike from negative to positive. What is of immediate concern though, is the trajectory that growth rates have taken since then.

Again, the graph presented here is as of June 30, 2010. While we know the ECRI data has deteriorated further since June, we won't have GDP figures for a while yet. Given the data in hand, it's clear that past growth downturns of the same extent have often gone on to become recessions.

However, there are a few exceptions where these growth rates dipped below zero and then recovered. If we had good reason to expect positive economic tailwinds, we would be less concerned about the present deterioration. Unfortunately, my impression is that the bulk of the growth that we did observe coming off of the June 2009 economic low was driven by a burst of stimulus spending coupled with a variety of programs [which acted] to pull economic activity forward. My concern is that these synthetic factors are now trailing off, with little intrinsic economic activity to carry a recovery forward.

Suffice it to say that we're not yet out of the woods.

Employment Growth Versus GDP Growth

One clue about possible GDP growth can be obtained by looking at employment growth, since the two are clearly related. On a quarterly (non-annualized) basis, the average quarterly change in non-farm payrolls since 1960 has been about 0.4% (standard deviation +/— 0.6), while the average quarterly change in real GDP has been about 0.8% (standard deviation +/— 0.9). As of the August employment report, non-farm payroll growth over the past 3 months has been about -0.2%, or about 1 standard deviation below the norm.

This would correlate to a quarterly GDP loss of about -0.4%, or roughly -1.6% on an annualized basis. Of course, part of that employment loss was during June, so if we get 100,000 new jobs in the September employment report, the quarterly change will also be roughly flat, making it a coin flip as to whether third-quarter GDP was positive or negative. Unfortunately, the high rate of new claims for unemployment suggests continued pressure on the job market.

The 4-week average of new claims is presently at 459,500 weekly, which already would be associated with payroll job losses. But it is important to recognize that these job losses are on an already depressed labor force. To put the figures on an equal footing with historical data, one can place the data in the context of a fully employed labor force, by dividing by (1-.01 x unemployment rate). Admittedly, the current data would be even worse if we fully adjusted by using the U6 unemployment rate, which includes discouraged workers, but using the overall employment rate is sufficient to improve the statistical usefulness of the new claims data.

The chart below presents the historical relationship between the adjusted weekly new claims data and adjusted monthly non-farm payroll job growth. Note that the present rate of new claims would typically be consistent with roughly 250,000 monthly job losses on an adjusted basis, which works out to about 226,000 job losses given the present rate of unemployment. Fortunately, there have been other instances where job losses were thankfully much less than implied by the new claims data, but it is clear that the persistently high level of weekly new unemployment claims is inconsistent with the expectation of robust payroll gains.

Frankly, I am hoping that we are wrong on this. Our investment strategy is a long term one. We don't rely on being "right" about individual instances. Rather, we focus on average outcomes, taking greater exposure to risk in conditions that have historically been associated with favorable returns and taking less risk in conditions that have historically been associated with weak returns— on average.

The present overall return-to-risk profile is not favorable, on average. But again, despite our present defensive position, we would prefer— hands down— to be wrong about oncoming economic weakness. In our view the market is already fully priced for an economic recovery anyway, so the challenges are steep for investors even without a further downturn. As I've noted before, risk management is forgiving.

During the past decade of rich valuations, and based on our analysis, throughout history, the temporary returns that investors have missed during periods of hostile valuations and overbought conditions have been more than compensated by the avoidance of subsequent— often profound— losses that correct those valuations. But this is a long term, average tendency. We aren't market timers— we are risk managers. For now, conditions continue to stack on the defensive side.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

US Confidence Declines

¹²US Confidence Declines To Lowest Since February
The Ugly Reality Of Lowering Debt By Default
Home Prices To Take Hit Next Year In Many Markets
Walking Away With Less

By Caroline Valetkevitch | 29 September 2010
  • Consumer confidence index falls to 48.5 in Sept
  • S&P/Case Shiller home prices declines 0.1 pct in July
  • CEO Economic Outlook Index dips to 86 in 3rd qtr (Updates with U.S. market closing prices, adds gold prices)
NEW YORK, Sept 28 (Reuters)— U.S. consumer confidence fell to its lowest level in seven months in September, underscoring lingering worries about the strength of the economic recovery. But in a sign of stabilization in the housing market, U.S. home prices hovered above multi-year lows without the help of the homebuyer tax credit that ended in April. The day's data is the latest to give a mixed signal on the economy, with a 9.6 percent unemployment rate and still-tight access to credit among factors hurting consumers and keeping concerns about a double-dip recession alive.

"With unemployment at a 26-year high, confidence among consumers remains weak. This decline in sentiment will give the Fed a stronger reason to increase stimulus in November," said Kathy Lien, director of currency research at GFT in New York. The Federal Reserve said last week it was prepared to put more money into the economy, if needed, to stimulate the recovery and avoid deflation.

The Conference Board's index of consumer attitudes fell to 48.5 in September from a revised 53.2 in August, pressured by a weak labor market and environment for companies. That was below the median of forecasts from analysts polled by Reuters, which was for a September reading of 52.5. The August reading was revised down slightly from an original 53.5. The report also showed inflation expectations eased slightly, even with the Fed's stance on the economy. Last Friday the Thomson Reuters/University of Michigan's preliminary September reading on U.S. consumer sentiment was worse than expected and at the weakest level in more than a year.

U.S. stocks .SPX initially extended declines following the confidence data, but ended the day higher as investors snapped up some of the month's better-performing sectors. Though weak stock market prices weighed on consumer morale, the benchmark Standard & Poor's 500 index is on track to rise 9.4 percent in September after a 4.7 percent decline last month. "Consumer confidence is being sapped by high unemployment, low equity prices and now a renewed decline in house prices. This all suggests that the outlook for consumption growth remains ominous," said Paul Dales, a U.S. economist at Capital Economics in Toronto.


The Ugly Reality Of Lowering Debt By Default

By Nin-Hai Tseng | 29 September 2010
September 28, 2010: 2:35 PM ET

FORTUNE— There have been at least a few seemingly positive signs of progress during this anemic economic recovery: U.S. households are spending less. They're saving more. Debt is steadily falling.

But don't be fooled by the cheery headlines. The trend toward fiscal discipline might sound uplifting, especially at a time when many have learned all too painfully that they spent too much in the years leading up to the financial crisis. But dig a little deeper and you'll find that even the best economic news is masking something ugly.

It turns out that many households aren't exactly tightening their wallets and using all their saved cash to pay down debts. They're simply defaulting on them. Total household debt fell by $77 billion during the three months ending in June, but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans, according to Capital Economics Group. In a recent report, the London-based economic research consultancy found that this isn't necessarily a new development. Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak, which is the equivalent of reducing debt at every household by $4,200.

Shedding away debt— however it's done— is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.

This will probably prolong the de-leveraging process further, say analysts at Capital Economics. Until households can meaningfully shed off debt, it will likely be one of the key factors stalling economic growth and the job market as many companies wait for GDP to pick up significantly before hiring more workers.

Cutting Plastic Or Cutting Credit Card Bills?

The wave of defaults on mortgage loans is no surprise, given the rise in foreclosures and the fall in housing prices. But perhaps even more troublesome is the increase in consumer defaults on credit card debt. It's been widely reported that debt levels on credit cards have fallen— at one point surprisingly dropping below the level of outstanding student loans, according to an August story in The Wall Street Journal.

But consumers haven't exactly discovered a newfound sense of frugality. In 2009, outstanding credit card debt dropped by about $93.2 billion compared with the previous year, according to a report from, a credit card comparison website. This might sound like good news, but the reality is that the majority of the drop— $81.6 billion— is due to Americans defaulting on their debt.

So the 'real' decrease is much smaller— about $11.6 billion— and much of that came during the first quarter when many people used tax returns to pay down card debt. At this rate, predicts consumers in 2010 will actually accumulate at least $26.2 billion more in credit card debt over last year. "It's alarming," CEO and founder Odysseas Papadimitriou says. "We cannot revert to pre-recession debt levels."

Household debt might generally be falling, but at what cost? Those who default, depending on the size of the loan, take sizeable hits to their credit background, which could impact the terms of future loans. So while consumers' debt burdens might technically be less today than they were just a few years ago, at least on paper, the burden is still quite heavy on the minds [[and ability to borrow: normxxx]] of a significant number of consumers.

The 30-year Treasury yield fell nearly 7 basis points to 3.66 percent, its lowest in about three weeks, while the dollar slumped against the euro. At the same time, gold rose to a fresh record high as reports fueled views the central banks would stimulate the economy with new liquidity. The Standard & Poor's/Case-Shiller data showed U.S. home prices declined in July.

The index of 20 metropolitan areas was down 0.1 percent in July from June on a seasonally adjusted basis, as expected in a Reuters poll. But it followed a 0.2 percent June rise, which was revised down from a 0.3 percent increase.

Business Outlook Weakens

In another sign of concerns over the outlook for the U.S. economy, a U.S. Business Roundtable survey found the number of CEOs who expect their companies' sales and U.S. headcount to rise over the six months declined in September. The Business Roundtable's CEO Economic Outlook Index declined to 86 in September from 94.6 in June. In contrast to U.S. sentiment indicators, overseas data Tuesday showed the consumer mood in Germany and Italy improved and French consumer spending rose during the summer. President Barack Obama, who is travelling across the United States this week to try to drum up voter enthusiasm ahead of the November U.S. congressional elections, signed a $30 billion small business lending bill into law on Monday.

With worries about the economy in the forefront, opinion polls suggest the Nov. 2 mid-term elections could result in the Republicans wresting control of Congress from the Democratic Party.

Home Prices Up Versus Year Ago

S&P, which publishes the home price indexes, also said home prices in the 20 cities index rose 3.2 percent from July 2009, a slower annual pace than the 4.2 percent increase in June. Data last week showed new home building rose in August and sales of previously owned houses crawled off a 13-year low. Analysts have been watching for signs of stability in the housing market after declines seen with the end of a tax credit for home buyers in April.

"People are still waiting to get a set of numbers that has absolutely none of the government incentive in it for home buyers. From what I was able to gather, we are a couple of months away from that," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois.


Home Prices To Take Hit Next Year In Many Markets

By Alan Zibel and Janna Herron | 29 September 2010

WASHINGTON— Don't take the latest snapshot of U.S. home prices too seriously. The Standard & Poor's/Case-Shiller 20-city index released Tuesday ticked up in July from June. But the gain is merely temporary, analysts say. They see home values taking a dive in many major markets well into next year.

That's because the peak home-buying season is now ending after a dismal summer. The hardest-hit markets, already battered by foreclosures, are bracing for a bigger wave of homes sold at foreclosure or through short sales. A short sale is when a lender lets a homeowner sell for less than the mortgage is worth.

Add high unemployment and reluctant buyers, and the outlook in many areas is bleak. Nationally, home values are projected to fall 2.2 percent in the second half of the year, according to analysts surveyed by MacroMarkets LLC. And Moody's Analytics predicts the Case-Shiller index will drop 8 percent within a year. Among the areas likely to endure big price drops, according to Veros, a real estate analysis company:
  • Port St. Lucie, Fla., and Reno, Nev., where prices could fall 7 percent over the next year.
  • Orlando and Daytona Beach, Fla., which face price drops of at least 6 percent.
  • Las Vegas, which led all declines in the latest report, is also expected to post a 6 percent drop. Home values there have already tumbled 57 percent from their peak four years ago.

Las Vegas has been hit by foreclosures and the loss of tourism and construction jobs. More than 70 percent of homeowners there owe more on their mortgages than their homes are worth, according to real estate data firm CoreLogic. And the city's unemployment rate is nearly 15 percent, one of the highest for major U.S. markets.

The outlook in Orlando is also grim. More than half of borrowers owe more on their mortgages than their properties are worth. The unemployment rate there is nearly 12 percent.

This year, about 2 million, or 41 percent, of the 5 million homes sold will be distressed sales, predict analysts at John Burns Real Estate Consulting in Irvine, Calif. 'Distressed sales' include foreclosures and short sales. For next year, that figure is on pace to hit 2.4 million homes, or 45 percent of all sales. Distressed sales are projected to make up at least a quarter of the market for the next four years. In healthy housing markets, distressed sales typically make up only 6 to 7 percent of annual sales.

A much brighter outlook is forecast for some areas of the country, especially major cities that never experienced an outsized housing boom— and bust. Major cities in Texas, for example, have relatively healthy economies and low levels of foreclosures. Dallas home prices fell only 11 percent from their peak in 2007 and bottomed out last year. They have since rebounded about 8 percent. Houston and Dallas are projected to rise about 3 to 4 percent over the next year.

Those markets "don't have the huge supply of homes that a lot of the coastal markets have," said Eric Fox, vice president of economic and statistical modeling at Veros. Houston and Dallas both have jobless rates of under 9 percent, below the national average of 9.6 percent. And in both cities, fewer than 15 percent of borrowers owe more on their homes than their properties are worth.

Nationally, prices have risen nearly 7 percent from their April 2009 bottom. Yet they remain nearly 28 percent below their July 2006 peak. Most experts predict about 5 million homes will be sold this year. That would be in line with last year and just above 2008, the worst sales performance since 1997.

The latest changes in the Case-Shiller national index represent a three-month moving average— for May, June and July. Sales in May and June were inflated by government tax credits that have since expired. July was the worst month for home sales in 15 years. August wasn't much better. The record number of foreclosures, job concerns and weak demand from buyers have combined to weigh down prices. "The market, at best, is weak, and starting to decline," said Michael Feder, chief executive of Radar Logic Inc., which tracks the housing market.


Walking Away With Less

By Dina Elboghdady and Dan Keating, WP | Sunday, 26 September 2010

Click Here, or on the image, to see a larger, undistorted image.

Manassas homeowner frustrated over short sale delays
For more than two years, single mom Monica Valladares has been trying to sell her home on a street that has had more than 10 short sales since May 2009.
Launch Photo Gallery

A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs. Its unsettling effects are playing out here in Manassas, along Brewer Creek Place, a modest, horseshoe-shaped street lined with 98 brick townhouses. Several years after the U.S. foreclosure crisis erupted, the U-Hauls are back.

The last time, banks seized nearly every fourth house on the street through foreclosure. This time, homeowners are going another route: a short sale. "I love this house, but I just have to leave," said Leanna Harris, 27, the owner of a corner unit that used to be the builder's model, with a stone path in the yard and a gourmet kitchen. "I'm at peace with it now."

The original owner bought the home for $400,714 in 2006; Harris and her husband, both bartenders, paid what seemed to be a bargain price, $289,000, in 2008. But they have fallen behind on their mortgage payments, in part because her husband was out of work. Now they have a $246,000 offer for the home, and the balance on their mortgage is more than that. They want to accept the offer. All they need is their bank's okay.

That kind of deal is called a short sale, and it's sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what's owed on the mortgage. Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic.

The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007. Distressed homeowners are being drawn to short sales in large part because they can help protect a borrower's credit rating and thus the chance of buying another home later on.

"I worked hard for a long time to keep my credit score close to perfect, and I know a foreclosure would be much worse for my credit than a short sale," said Harris, who listed her Brewer Creek Place home as a short sale about a month ago. "If there's a chance we can avoid foreclosure, we'd rather do that". In a short sale, homeowners must get the go-ahead from the mortgage lender. Sometimes that happens before the property is put on the market, and other times before the deal closes.

In some areas of the country, including the Washington region, lenders can later pursue borrowers for the difference between the proceeds collected from the short sale and the amount owed on the mortgage, also called a deficiency. But lenders say they only do so if they conclude the borrowers skipped out on a loan that they could afford. For lenders, short sales are less expensive than foreclosures to handle and help ensure that homes transfer in good shape.

And for the wider real estate market, these sales could help shore up the floor under housing values because homeowners— unlike with foreclosures— have a vested interest in getting the best price. That's because the higher the offer, the more likely the lender will approve the sale. But short sales are prone to maddening delays and often fall through because they require the approval of many, often-competing parties— including the primary mortgage lender and in some cases the holders of second and third liens.

Across the Washington region, short-sale listings now far outpace the number of foreclosures available for sale, according to RealEstate Business Intelligence, a subsidiary of the local multiple listing service. About 14 percent of area homes for sale are short sales, more than double the figure for foreclosures, with some of the greatest volume in Prince George's and Prince William Counties, where the drop in housing prices has been especially pronounced. Brewer Creek Place, which wraps around the back end of the Independence subdivision south of the Prince William Parkway, was first developed five years ago on the eve of the housing market meltdown. Most of the residents bought their townhouses at a time when mortgage lending standards were especially lax, leaving some borrowers saddled with staggering debts when the home-loan market collapsed.

Yet along the street, there are few signs of the turmoil. Kids zip around on scooters. Neighbors primp their flower beds. But from her driveway, Brenda Holliday has watched the crisis spread. Taking a break from hosing down her convertible PT Cruiser on a recent Saturday, she pointed to the three homes to her right. Each had sold as a foreclosure since 2008.

Then she pointed to the door to her immediate left with a lock box hanging on it. "That's a short sale," she said. She nodded to the corner unit further down the block. "I think that's a short sale, too". To Holliday, 60, her townhouse seemed ideal when moved in four years ago shortly after she was widowed. She's been renting the place from the owner with half of each monthly payment credited toward her eventual purchase of the home, which she initially agreed to buy for $365,000.

Leanna Harris may have been the first on the street to buy a home as a short sale. When she did, in early 2008, such deals were so rare that Prince William County hadn't even started to track them yet. "I wanted this house really bad," said Harris, who went to settlement on the home the day after their baby girl was born. "It is my dream house."

But before long, she and her husband were looking at a short sale from the other side. The Harrises fell behind on their payments and never regained financial footing, she said. The couple received temporary relief for six months from Bank of America. But Harris said the bank ultimately rejected them for a permanent loan modification and threatened foreclosure unless they immediately made up the $10,000 in payments that had been deferred, including interest and fees, or sold the house.

Harris said she felt tricked. But she listed her home as a short sale because it seemed to offer a relatively painless way out. She said she doesn't expect the bank's approval to come quickly. Lenders readily acknowledge that they are overwhelmed with the volume of short sales coming their way. "It has taken considerable effort to build up the capacity to do these [short sale and modification] processes and also to connect them together," said David Sunlin, a senior vice president at Bank America. "We're adding staff and vendors and technology".

The Obama administration, meanwhile, has been seeking to encourage even more short sales as a way of reducing the nation's inventory of vacant and abandoned properties. In April, the administration launched a program that financially rewards lenders and borrowers for successfully negotiating a short sale if the borrower's loan could not be modified through the federal government's year-and-a-half-old foreclosure prevention effort. Lenders receive $1,500 and borrowers another $3,000 for moving expenses. Under the initiative, all eligible borrowers must be notified of the option to sell their homes short before their loans are referred to foreclosure.

The Treasury-run program also sweetens the deal for borrowers by relieving them of any obligation to repay a deficiency. Clearing the way for a short sale has often proved cumbersome because there can be so many parties to a potential deal. Aside from lenders, transactions may also have to be green lighted by investors who own the mortgages, local tax authorities, appraisal firms, escrow companies, homeowners associations, mortgage insurance companies and subordinate lien holders.

That's why the administration cannot simply order a lender to approve a short sale, said Laurie Maggiano, policy director at the Treasury Department's homeownership preservation office. "We have to give servicers discretion to make intelligent business decisions as to which properties are likely to be successful short sales, rather than say everybody has to get one," she said. It can also be difficult to persuade mortgagees to participate, because of the risk that approval will fall through.

According to Frank McKenna, a vice president at CoreLogic, the industry is on track to incur about $310 million of unnecessary losses on these transactions every year.

Monica Valladares, 29, has been trying to offload her home on Brewer Creek Place for more than a year. She bought it new for $329,000 in 2006. Keeping up with her mortgage payment was easy when her three roommates— her grandmother and two cousins— were chipping in. But the arrangement fell apart, the family scattered and Valladares, a single mom, said she could not afford the home on her salary as a researcher for a telecommunications company.

In early 2009, Valladares listed the townhouse as a short sale for the first time. The home, overlooking a wooded lot and playground, quickly attracted multiple offers. The highest was $220,000, she recalled. She moved out, thinking the turnaround would be quick. But her agent could not get the bank to review even the most lucrative contract, she said.

When the potential buyers dropped out about six months later, Valladares applied to Bank of America for a loan modification that would reduce her payments. A few months later, Valladeres was told she did not qualify, she said.

Desperate, Valladares tried the short-sale route again. "I don't know what else to do, what else to try," Valladares said during a recent visit back to the vacant town home. "This house is damaging my credit big time". Within days, she received a $220,000 offer.

When she called her primary lender to get approval for the deal, however, the bank said she wasn't eligible for a short sale because she had been enrolled in a loan modification program after all, Valladares recalled. Straightening out the confusion took weeks. The lender finally agreed to the sale. But there were more obstacles. For one, the homeowners association said Valladares must pay $4,000 in dues and late fees before it will clear the sale, she said, adding she doesn't have the cash.

Yet another problem is that Valladares had taken out a second mortgage to help her finance the original purchase of her townhouse. The lender on that second loan has yet to approve the short sale, said Roger Derflinger, her current real estate agent. "The offers come quick," Valladares said. "It's the bank that's slow."

But as she's grown older, the stairs have gotten harder, she said, and now she feels a bit trapped. If she leaves, she loses the money she put toward the purchase. If she stays, she'll have to pay about $150,000 more than the townhouse is worth. Its value has been eroded by the steady stream of nearby foreclosures and short sales.

Holliday squeezed the garden hose full throttle. "A moving van pulls up and another family is gone— that's all I know," she said. "It's plain sad."



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Friday, September 24, 2010

A Recovery That Looks Like Recession

¹²Market Commentary
A Recovery That Looks Like Recession

By The Comstock Partners Inc. | 23 September 2010

For some strange reason a number of economists and strategists seen on TV and quoted in the press maintain that the exceedingly weak recovery we are now undergoing is really a "normal" or "average" recovery. Nothing could be further from the truth. This is not our opinion, but is based on fact.

We have taken eight major economic indicators and compared them to where we are now as compared to the economic peak 33 months ago. We did the same for the equivalent time periods for the prior two business cycles, using dates designated by the National Bureau of Economic Research. We did not use surveys, opinions or diffusion indexes, but relied on basic economic indicators related to employment, income, consumption, production, housing and capital expenditures.

The results are very clear that the current recovery is far weaker than the prior two expansionary periods, which themselves were below the average for post-war recoveries. The results are outlined as follows. Remember, for each indicator we are showing the change over 31-to-33 months after the cyclical peak for the economy.

1) GDP was up 5.3% and 5.7% at this point in the last two cycles, and is now down 1.3%.

2) New home sales were down 8% and up 31%; now down 42%.

3) Industrial production was up 3% and 1%; now down 7%.

4) Retail sales were up 9% and 12%; now down 4%.

5) Payroll employment was flat and down 2%; now down 5%.

6) Personal income was up 11% and 7%; now up 2%.

7) New orders for durable goods were up 5% and 6%; now down 22%.

8) Initial weekly unemployment claims were down 5% and 9%; now up 34%.

The facts speak for themselves. Moreover, as we discussed in previous comments, even this sub-par recovery has been losing steam in recent months. That is why six months ago the discussion centered on when and how the economic stimulus would be removed, whereas now all of the talk is about another round of quantitative easing (QE2).

Does anyone really think that the probability of QE2 a full 33 months after the economy peaked and 15 months after it bottomed is really saying anything positive for the economy or the stock market? The current market seems based on the same delusionary views that prevailed at the tops of early 2000 and late 2007. In our view the economy will continue to disappoint for some time to come. That is not being discounted at current market levels.


More On The ECRI Leading Indicator

By The Comstock Partners Inc. | 16 September 2010

Last week, toward the end of our comment on consumer deleveraging, we mentioned that the year-over-year change in the ECRI Weekly Leading Indicator had strongly suggested the distinct possibility of recession. In answer to some questions about it, we would like to provide a bit more detail this week.
When we were writing last week the latest release showed the indicator declining 4.11% from a year earlier. We therefore searched the historical data to determine what happened to the economy at other times when the indicator had fallen by that amount or more. We found that over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or after the signal. This week we re-examined the data, except that this time we looked for a decline of 3.50% or more, and found that the lead times were even better in four of the seven occurrences.

We can make a number of observations from the data. In all seven instances where the index fell 3.5% or more from a year earlier a recession occurred shortly before or after the signal. There were no occasions where the index declined 3.5% without a recession. In two cases the signal led the recession, in three cases it followed, and two times it occurred in the same month. It ranged between a five-month lead and four-month lag.

The average and median lead times were zero. In all instances the market had peaked before the signal, anywhere from one to ten months, with an average of five and a median of two. We note again that ECRI Managing Director Lakshman Achuthan has not officially called a recession, although he has stated that, based on his indicator, there was more than a 50% chance of one. Although we would not rely on any single indicator to form an opinion, the ECRI Leading Index strongly supports our view as discussed extensively in prior comments that the economy, at best is headed for a severe slowdown, and, at worst, another recession. It also makes it much more likely that the April peak in the S&P 500 will turn out to be the 2010 high, and that the performance of the economy in the period ahead will be highly disappointing to investors looking for a normal economic recovery.

Housing And The Economy

¹²Housing And The Economy

By Normxxx | 24 September 2010

Yesterday morning, it was reported that existing home sales rose 7.6% in August from July's level. Wow. The instant reaction was that housing has bottomed.

But even a 7.6% improvement from July's horribly depressed level makes August the 2nd worst month on record, and has existing home sales so far in the 3rd quarter running at a 29% slower pace than the 2nd quarter. Compare August sales to a year ago. In August of last year, existing homes sold at an annualized rate of 5.1 million homes. Yesterday's report was that this August they sold at an annualized rate of 4.1 million homes, down 19.6% year over year. Compare the 3rd quarter so far to the 2nd quarter.

In April, existing home sales were at a 5.77 million annualized rate, in May 5.66 million, and in June at 4.6 million. That's a monthly average of 5.34 million for the 2nd quarter. (But note also the direction of those numbers— all down— and during some of the normally strongest months for housing!)

So far in the 3rd quarter, the bottom has dropped out of housing again. Existing home sales plunged in July in the largest monthly decline ever, to an annualized pace of only 3.37 million homes. And yesterday it was reported that August sales were "up" 7.6% from that July record low, but to only 4.13 million homes (the second lowest monthly pace on record).

So the monthly average in the 3rd quarter so far is an annualized rate of 3.75 million existing homes sold, down from the monthly average in the 2nd quarter of 5.34 million. That's a 29.7% quarter to quarter decline. This is not a positive report by any means, but another sign that the economy in the 3rd quarter is worse than the dismal 2nd quarter, when GDP grew at only a 1.6% pace.

Meanwhile, new home sales remain near record lows, coming in unchanged in August. Sales of new homes were flat in August at a seasonally adjusted annual rate of 288,000, the second lowest level since the Commerce Department started tracking new home sales in 1963. Last month, the Commerce Department had reported that sales plunged to a record low of 276,000, but this month it revised that number to 288,000. Sales year-over-year are down 28.9%.

"It would have been nice to have finally seen a nice upward blip, but this is not surprising at all," said Leif Thomsen, CEO of Mortgage Master. "Builders are unable to get financing for new homes in this economy, and buyers aren't in a hurry to buy because they know nothing is really selling. "If people don't have jobs they obviously aren't going to go out and buy homes. If unemployment doesn't get worse, we can expect a very slow, but upward move from here."
The government report showed that the median price of new homes sold in July was $204,700, a 0.5% decline from July and down more than 1% from August 2009. At the end of August, 206,000 new homes were for sale. At the current sales pace, the government expects the supply to last 8.6 months.

"This is a very, very small step in the right direction but shows that prices are starting to stabilize," said Thomsen, warning that it is likely to take years for prices to fully stabilize. "If you have a stable market, you're looking at inventory of six to seven months. Since builders are afraid of building in this environment and can't get the financing to build, the [current] supply might not change much in the near future."

Fed: Recovery Continues To Slow

By Chris Isidore, Senior Writer | 21 September 2010

NEW YORK (— The U.S. economic recovery continues to lose steam, the Federal Reserve said Tuesday, but the central bank unveiled only tougher language but no new policies to try to spur growth. While the Fed said it expects improvement ahead, it cautioned "the pace of economic recovery is likely to be modest in the near-term". The Fed left its federal funds rate at close to 0%. That overnight lending rate, which is used as a benchmark to set the rates paid on a wide variety of business and consumer loans, has been at that level since December 2008.

The Fed's statement again promised that this rate would stay at an "exceptionally low levels" for an "extended period." The Fed also announced it will continue to make new purchases of Treasurys with the proceeds of its earlier investments. That policy was announced at its previous meeting last month.

While the Fed did not announce any additional steps Tuesday, it was more aggressive in what it promised to do in the future if conditions weaken further. In its statement, the Fed indicated it is prepared to "provide additional accommodation" in order to "return inflation" to slightly higher levels. Since central banks typically are more concerned with fighting, rather than feeding, inflation, the language was very unusual. It may be a sign that policymakers are more worried about the risks posed by lower prices rather than higher prices.

"That's pretty aggressive talk," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. "They didn't draw the sword, but they sure rattled it quite a bit". The Consumer Price Index, the government's key measure of inflation, is up only 1.1% over the last 12 months, while the 'core' CPI, which strips out 'volatile' [[ie, inconveniently higher: normxxx]] food and energy prices, is up only 0.9%.

The Fed is widely believed to want to see core CPI up at least 1% to 2% in order to keep prices steady. One fear is that if prices fall, it can cause businesses to cut back production. That can lead to further job losses. McCain said the Fed's statement lays the groundwork for the central bank to make additional purchases of assets such at Treasurys at subsequent meetings.

"This takes a major step in that direction," he said. "It's as much as they can do without announcing an actual date and details of such action". But other experts said it may not matter what the Fed does at this point.

Sung Won Sohn, economics professor at Cal State University Channel Islands said that while the Fed has been making promises that it stands ready to act, "unfortunately, what the Fed can do to boost the economy is very limited." Once again, Kansas City Fed President Thomas Hoenig objected to the statement and Fed policy. He argued the economy continues to recover at a moderate pace and that keeping rates so low for an extended period could lead to a new bubble in markets that will cause greater problems down the line.

Still, the Fed said there are numerous signs of weakness in the economy, including employers reluctant to add staff, a depressed housing market, a slowdown in the growth of business investment and only modest improvement in consumer spending.