Saturday :: Jul 1, 2006

No More Mr. Nice Piggy Bank!

by pessimist

For years, consumer product companies have been relying upon real estate appreciation to drive their profit margins ever higher.

Unfortunately for them, that particular gravy train has run out of coal. Former Clinton Labor Secretary Robert Reich is the self-elected bearer of the bad news:

America’s housing bubble has not exactly burst. It’s just sprung a leak the size of your average mortgage banker. What’s clear is the boom is over.

It’s better that bubbles leak than burst. Gradual declines are always easier to manage than explosions. But the housing boom has been so large and important to the American economy over the past five years that even this slow leak will cause severe headaches - one will be experienced by millions of households that had turned their growing home values into piggy banks to finance their continued consumption. That easy route to cash is just about gone.

The inevitable result will be less consumption, which will mean fewer jobs.
[W]e’re talking about a vast army of carpenters, plasterers, roofers, plumbers, electricians, mortgage bankers, home inspectors, real estate agents, architects, structural engineers and many more. According to Moddy’s, housing-related employment has accounted for almost a quarter of the five million jobs that have appeared since 2003.

In other words, Bu$hCo 'Boom' jobs - and blind GOP votes.

Housing has been one of the few bright spots in the economy. These jobs pay well even though most of them don’t require a college degree. That’s because they don’t have to compete in global commerce.

But now with the housing boom over, many of these good jobs are over, too. There’s a record number of unsold homes on the market: 565,000 new ones and 3.4 million previously owned residences. In other words, a glut.

[W]ithout the housing bubble, the American economy will lose a lot of its fizz. [F]rom a jobs standpoint this recovery has needed all the fizz it can get. Median wages have gone nowhere. The ranks of the long-term unemployed have been unusually high. The percent of the labor force with jobs is lower than in 2000.

All of which brings us to Ben Bernanke and his gang at the Federal Reserve Board Open Market Committee. They’re determined to raise interest rates because they think the economy is too fizzy and still prone to inflation. I hope they listen carefully: The hissing sound they hear is air escaping the housing bubble. There’s less fizz in the economy than they think.

Raise interest rates, and the Fed raises the likelihood the economy will deflate.

I went looking for corroborative sources for Reich's assertion, and stumbled across this interesting little tidbit:

We find it of great interest that the Federal Reserve tells us whether or not they will continue to increase short—term interest rates based upon upcoming data. They have to know as we do that the data, at least from the Bureau of Labor Statistics, has been altered. The question is do they use the altered data? Does the Fed have its own unaltered data? We don’t know because the Fed won’t tell us. It is a secret, just like M3 is now a secret.

The Fed has partial transparency, so it’s very difficult to discern on what they are basing their decisions. It’s certainly not completely on data as they say it is.

Based upon past performance the Fed is
still a year behind what has already happened
in the economic and financial worlds.

Can it be that all of the rosy economic assessments out of Bu$hCo are only a report on where we've already been?

There is much reason to be concerned about the economic health of the nation. This article, admittedly an advertisement on steroids, lists many of them. As an engineering sort myself, I understand why the worst-case scenarios contained in this piece. They are things to prepare for to the best of one's abilities, for there is no reason to believe they won't come about.

It isn't too hard to find other sources for information on the US dollar losing its special status as the world's reserve currency as oil-producing nations take steps to price oil in other currencies instead:

[T]he dollar will be under constant pressure as Russia, Iran and Venezuela sell oil-denominated in euros and rubles. The very foundations of the dollar as the world’s reserve currency will be under constant threat.

Such a development, also easily researched, would lessen the value of the dollar for foreign investors:

The yen carry trade is winding down. That is when you borrow yen at ½%, buy US dollars with the proceeds, and then invest it usually using leverage. If Japanese rates are rising, which they will, and the yen rises in value, which it will you will be hard pressed to make a profit and you may lose money.
Trillions of dollars have been purchased in this manner over the past eight years.
This has put a prop under the dollar because it creates dollar demand and devalues the yen.
As the trade is reversed the opposite happens. The dollar weakens and the yen strengthens. This change in tactics is going to profoundly affect the purchase of US Treasury and Agency debt and to an extent affect stocks, bonds and to a lesser degree commodities.

* As the carry trade ends Treasury and Agency debt will be sold, which in turn will cause interest rates to rise in the US.

* As this debt falls in value all those holding it will be sellers as well.

Not only will interest rates rise,
but also who among foreigners will supply $3 billion a day
so the US doesn’t go bankrupt?
This pressure will also cause the dollar to fall in value. Countries exporting to the US have been keeping the value of their currencies low by printing yen or Yuan, buying dollars and then Treasuries. That scenario will end and the currencies of exporters will rise in value, the dollar will fall, foreign goods sold in America will cost more and America will have more unwanted inflation.

It’s all pretty simple, nothing esoteric. If government, Wall Street and corporate America explained such things everyone would understand and then this triumperate would have to stop screwing the public. To think that such a Japanese policy existed is pure insanity. Now it’s hangover time.

The end of the yen carry trade is going to be very painful for Americans. Over the past four months the economy has started to slow down and that doesn’t help matters. The momentum has been lost.

Most of the money from the carry trade went into Treasuries and Agencies, that were leveraged [used as collateral for loans], then invested in this order: third world stocks and bond markets, other stock and bond markets and to a small extent in commodities. As you have seen over the past two months foreign stocks and bonds are off 28% and 10% respectively.

That is one reason why the pressure will really start to build on US markets, particularly debt markets. An illegitimate source of funding will have ended.

The problem left for foreigners is what do they do with the physical dollars they are holding? They don’t want to be in US debt or stocks so the only alternative is commodities, gold and silver. That is because they are a store of value. That is why they have been buying them and this is why they are rising in value. It’s a flight to quality, a flight to reality.

Nor is it difficult to locate independent confirmation of the long and slim economic branch American consumers have slid onto:

[B]oth government and consumer debt, both of which are at record highs, [have] to be serviced at an ever more expensive rate.
As housing prices flatten out and then decline,
so will consumer spending that makes up 71% of GDP.
As house prices slide, equity's reduced. That means fewer equity loans and cash outs, which have been adding billions in spending by consumers - sixty percent of which kept consumers from financial difficulty.

We have had wage and salary increases but they have been limited. Income rises 3% and inflation rises 10%. That means even less purchasing power or less discretionary money available for spending.

There are a number of reasons for real estate to decline, besides being well overpriced: Staggering inventory, higher interest rates and affordability.

April’s affordability index was the lowest since July 1990. Last week’s 30-year fixed rate mortgage averaged 6.66%, the highest in some time. In 1990, the median house price was 2.7 times the median family income. Today it is 5.9 times.

A year ago real estate began challenging the law of diminishing returns. Today the growth in prices is almost gone and by September it will be gone and the slide will be underway. Interest rates are not going to spike higher, but they will gradually go higher.

A poor real estate high season will be a shocker to many, as will persistent inflation... The Fed would continue to increase money and credit trying its best to hide what it is doing. That means an inflationary recession, known as stagflation (stagnation and inflation simultaneously.) [T]hey have to deal with a dollar that has to be depressed by 30% to 50% - probably 50%.

Prices have risen ten months in a row. In just four months that index has risen from 62.5 to 77. The choice is higher prices and inflation or less corporate profits. We believe most of the higher costs and inflation will be passed on to the consumer. During the third and fourth quarter there will be a peaking out which we predicted early in the year.

This was the last comment which caught my eye - the most interesting of all:

You say to yourself, how did this all come about so quickly? It’s been two months since we told you the top elitists were disgusted with the Bush-neocon incompetence and did not want an invasion of Iran at this time with the messes they have in Iraq and Afghanistan and the deplorable foreign policy practiced by these fascist nitwits.

I guess even the Carlyle Group is fed up with Bu$hCo. Now if only they would let us do something about it!

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pessimist :: 7:31 AM :: Comments (4) :: TrackBack (0) :: Digg It!