Thursday, September 30, 2004

OK, OK, I'm owning up to the latest polls out of Ohio that show Kerry and Bush in a dead heat there.

The latest Gallup poll shows that among "likely voters," Bush leads Kerry 50-48 in Ohio. Of course, Gallup (like all the polling organizations) massages their numbers using fail-safe and ultra-secret methodological techniques to identify "likely voters". Among "registered voters," an objective category, Kerry actually leads in Ohio (50-46). This is the fourth poll in late September to show a dramatically narrowing race in OH.

Somewhere chibi is smiling.

Kerry is way ahead of Bush among registered Ohio voters on the economy (52-43) but way behind on terrorism (40-54) and Iraq (45-51). Kerry had better differentiate himself from Bush tonight on foreign policy issues, a subject where so far you need a micrometer to tell the differences.

The pressure is mounting. Somehow I suspect that Mount St. Helen's is going to be a much bigger blast than anything coming out of the upcoming G-7 meeting.
The International Monetary Fund added its voice on Wednesday to the growing calls for China to float its currency immediately, a move that supporters say would help reduce the United States trade deficit and strengthen the global economy.

On the eve of annual meetings here with the World Bank, Rodrigo de Rato, the managing director of the I.M.F., said that it would be to China's advantage to uncouple the yuan from the dollar.

The tight link to the United States currency has been blamed for making foreign goods too costly in China and Chinese exports unfairly inexpensive.

"There should be more flexible currencies, not only for China but the whole of Asia," Mr. de Rato said to a group of 10 journalists at his headquarters.
Every careful observer knows there is no chance in hell that China is going to float the renminbi. That being said, a one-time upward revaluation is indeed possible and necessary for all concerned.

Of course, these pressures have been building for years and the Bush administration hasn't done thing one about it. In fact, as long as Bush & Greenspan are determined to run massive fiscal deficits and rely on the Chinese (among others) to finance it, as well as nurture the housing bubble and rely on the Chinese (among others) to keep rates down and buy up Fannie Mae and Freddie Mac bonds, they can't push for a revaluation which will cut into China's current account surplus and thus into US government debt.

Remember, central banks aren't buying t-bills and the like because they're a good investment, so there is no reason to believe that if the People's Bank of China stops buying that private US investors, newly enriched by higher exports and lower import competition, will pick up the slack. And will a Chinese revaluation really have that much impact on the US current account deficit?

Renminbi revaluation pool, right here. Place your bets -- amount and date.

If this doesn't make you start shouting to the media "shut the hell up about inflation and start talking about deflation, you freaking morons!", I don't know what will.
Personal income and spending numbers on Thursday confirmed the underlying benign inflationary picture facing shoppers in the United States. . . .

. . . the PCE price index, one of the Federal Reserve's favorite measures of inflationary pressures, was unchanged in both July and August. On a 12-month basis the PCE price index has risen 2.1 percent. But the core measure, which excludes food and energy, was up just 1.4 percent.
These annual inflation numbers mask recent trends which are starkly disinflationary. Over the last three months, annualized inflation as measured by the PCE index is a mere +0.8%. The core PCE index is up just +0.5% on the same computation. Over the last two months, we are looking at an overall annualized inflation rate of -0.3%. That's outright deflation, folks.

The Department of Commerce tells us today that income growth in America is robust, but the consumer spirit seems to be flagging.
Personal income increased $35.1 billion, or 0.4 percent, and disposable personal income (DPI) increased $31.1 billion, or 0.4 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased less than $0.1 billion, or less than 0.1 percent. In July, personal income increased $19.9 billion, or 0.2 percent, DPI increased $15.0 billion, or 0.2 percent, and PCE increased $90.2 billion, or 1.1 percent, based on revised estimates.
Well, after that big splurge in July, what do you expect?

First, the good news (and why not?). Personal income and disposable personal income both rose in August at 0.4%, their fastest monthly pace since May. OK, that's about it for the good news (which, as Kash from AngryBear points out today, isn't all that good, anyway).

Even though income is rising, consumption is not. Personal consumption expenditures remained unchanged from July. Durable goods took another big hit, -1.6% on the month. Since May, annualized durable goods consumption is up a mere 0.2%, and even that meager pace is thanks solely to the reintroduction of the big car rebates in July which temporarily spiked purchases.

The overall consumption jump from June to July was so big that even an anemic September will make the consumption growth numbers for the quarter turn out respectable, but don't be fooled. Consumption has seen two truly bad months (June and August) out of the last three and three bad months (April, June and August) out of the last five. March wasn't anything to brag about, either.

Change from the preceding period in billions of chained (2000) dollars: Personal consumption expenditures

January . . . 13.9
February . . 29.2
March . . . . 4.8
April . . . . . -0.8
May . . . . . 47.2
June . . . . -42.7
July . . . . . 86.7
August . . . 0.2
It's not as if this income growth over consumption growth is causing personal saving to make a remarkable come-back, however. In August the personal savings rate was a pathetic 0.9%, although that was up from the contemptible 0.5% in July. Since 1935 the US personal savings rate has fallen below 1.0% only once: in 2001:IV when it rested at an amazing 0.5%. The third quarter might just be the second time.

Chew on that for a moment. Now consider that, according to the IMF, the United States sucked up almost 72% of the entire world's capital flows that year (the graph on page 3 truly speaks a thousand words). In second place was the United Kingdom -- at 4.5%! At the pace we're on, 72% won't be enough for long. We need more! We want it all!

Wednesday, September 29, 2004

When you're young and naive and taking introductory economics classes, you might actually believe that money is primarily a medium of exchange. Sure, it's also a store of value, but so are lots of other things: gold, land, cattle, houses, capital equipment, gems, etc. But without money, good luck on that whole trade thing.

Unfortunately, global finance capital throws this entire logic right out the window.
Trading on the world's foreign exchange markets has leapt to a record $1,900bn a day, driven by renewed interest in currencies as an asset class and the return of hedge funds specialising in currency bets.

Turnover in currency and interest rate derivatives sold by banks also soared to new record levels, according to a three-yearly survey by the Bank for International Settlements.

The rapid growth in financial market transactions - far in excess of the growth in world trade - is a sign of growing integration of global capital markets and increasingly sophisticated risk management by companies and investors.
According to UNCTAD, in 2003 global trade totaled around $9.2 trillion. That means that the world could do all the currency trading it needs to finance all the exchange of goods and services across borders in under 5 days. The other 360? The devil makes work for idle hands . . .

The final revisions to second quarter GDP make the big slow-down look a lot less slow.
The U.S. economy grew at an annual rate of 3.3 percent in the spring, the government reported Wednesday. That was significantly better than a previous estimate but still the weakest showing in more than a year.

The Commerce Department said the April-to-June increase in the gross domestic product � the country's total output of goods and services � was revised upward by 0.5 percentage point from its estimate just a month ago that the economy expanded at a 2.8 percent pace in the second quarter.
Why the big jump? According to the Commerce Department,
The upward revision to the percent change in real GDP primarily reflected a downward revision to imports and upward revisions to private inventory investment and to exports.
Let's start with trade. The preliminary revision of 2004:II GDP released late last month showed a trade balance of -$588.7bn. It's now revised upwards to -$580.3bn. It's a small revision and still chalks up the largest quarterly deficit of all time, but granted an improvement nonetheless.

If one adds $8bn to the 2004:II current account, the revision could bring the CA balance as a percentage of GDP down from -5.7% to -5.4%. Still a gigantic figure, and a US record.

The really big contributor to the upward revision in GDP is not trade, however, but gross private domestic investment. In the preliminary revision, investment was measured as growing 17%, but the final revision now says 19%. Equipment and software investment growth was revised significantly, from 12.1% to 14.2%, and that contributes the majority of the overall investment figure.

Note, however, that consumer spending was not revised at all, and still stands at 1.6% growth for the second quarter, the lowest figure since the 2001 recession when consumer spending in 2001:II rose a mere 1.0%.

At first blush, 3.3% growth sounds pretty good all things considered. But what does the larger picture tell us? Incredibly anemic growth in consumer spending combined with vigorous growth in capital investment. This is the fifth quarter in a row now where GDP growth has outpaced consumer spending growth. In 2004:II non-residential capital investment actually contributed more to GDP growth than consumer spending did, even though the former is one-seventh the size of the latter. This is a pretty unusual occurrence. Since 1970 (over 138 quarters) it has happened just 14 times, 11 of those being either in a recession or in a quarter preceding a recession. Today's "recovery" is becoming almost solely investment driven, by capital which can find no consumer to match it.

Yet again, more evidence that overproduction and deflation will continue to be the name of the game.

Tuesday, September 28, 2004

Barry Ritholtz tells us that past trends are predicting future decline.
Looking at the past two decades, whenever the Fed has started tightening AND the yield curve has flattened, it has presaged a downturn in economic activity, as reflected in the ISM.

That is exactly the situation we find ourselves in at present:
The data goes back to 1982, and Barry has a cool graphic to explain it all to you. Check it out.

Joe Stiglitz writes in the Financial Times today (sub. only) that it [the US presidential election] is most definately not about "the economy, stupid". He also inadvertently tells us exactly why Kerry is losing, if you read closely enough.
As an economist, I wish I could say of the upcoming US election: "It's the economy, stupid!" or just: "Jobs, jobs, jobs". But in this particular contest, the stakes are far greater than just the economy. . . .

But there are far more fundamental issues at stake in this election, centring on values: fairness, the balance of welfare between current and future generations, openness and transparency, the role of science, a sense of community and the meaning of American leadership. The huge Bush deficits are placing an enormous burden on future generations with little to show for it - other than the growing rich-poor divide and tightening squeeze on the middle class. The deficit has not financed more investments or research, nor has it improved education; the gap between the promise and fulfilment of these basic needs has even increased. America's problem in financing a social security programme could have been solved if Mr Bush had used part of the surplus he inherited from the Clinton years. Instead, that surplus has been squandered - and as a result, the compact joining one generation with the next is likely to be torn asunder.

Another aspect of that broken compact is the environment: Bush environmental policies, from increased arsenic in the water to growing air pollution, from unfunded toxic waste programmes to increased threats to natural wildlife, are spoiling the world our children will inherit. . . .

. . . if we are to live together in harmony, there are certain bonds that cannot be broken - bonds that reach across generations and ensure that those who are better off help those less fortunate.
There are other bits in the piece, but these excerpts give you the broad thrust of Stiglitz's comments. The theme that comes through again and again is the future. According to Stiglitz, Bush is ruining the future. The deficits are "an enormous burden on future generations". The problems with Social Security undermine the "next" generation. Dubya's environmental policies are "spoiling the world our children will inherit". Bush has "done nothing" about global warming. His entire set of policies and politics are destroying "bonds that reach across generations".

Fair enough. There is not a shred of doubt in my mind that the Boy King is indeed destroying the future. But that is exactly why most people (according to the polls) are going to vote for Bush in November; because the future is not here yet and thus inherently unknown. At least, there is always the possibility that things will be different from what we expect, even if that chance is very low, and that gives voters the luxury of supporting profligate acts today because they are not paying the consequences now.

Even more importantly, our failure to pay the consequences now (e.g. through higher taxes, higher interest rates, terrorist attacks in the US, a military draft, an economic depression, the end of Social Security checks, etc.) allows us to interpret the past, and thus the future, too, as far more rosy than it really is. Iraq is going to hell in a handbasket, but there is no military draft, no terrorist attacks in the US, no tax hikes to pay for the war, and no general Middle East war. So, says the Bush voter, why worry about the future when the past has been so good to me?

Individualistic democracy has a fundamental problem with intergenerational questions. The future can't vote in the present, and our individualistic ethos says "damn the future" and let them sort their own problems out. By appealing repeatedly to the future, Stiglitz is making an especially weak argument for the present.

More news from the edge. From today's WSJ (sub. only):
[Oil] Inventories in the U.S. have plunged substantially below last year's level, confounding predictions by many analysts that stocks were building. . . .

Oil inventories typically peak ahead of the Northern Hemisphere winter and are drawn down to meet high demand during the cold season, leaving stocks depleted by February, when the cycle begins again to meet high gasoline demand in the summer months. In recent weeks, however, U.S. inventories have been falling. Last week they fell to 269.5 million barrels, or about 17 days of refinery demand. The industry considers 270 million barrels to be the rough minimum needed to keep the oil-supply chain operating smoothly. . . .

"We've never seen such low inventories and such low [spare production] capacity," says John Cook, director of the petroleum division at the Energy Information Administration of the U.S. Department of Energy. "If I were a trader, I'd be very hawkish, very bullish" on oil prices.
Of course, what the Journal doesn't include in this review is the dramatic growth of inventories in the Strategic Petroleum Reserve. While private crude oil stocks are changed -4.9% from this time last year and fuel oil reserves -1.8%, the SPR has grown 7.8% over the last 12 months. This time last year, private plus public crude oil stocks in the US totaled 904.8 million barrels. Today that figure is 939.4 million barrels, nearly 4% higher.

The story is similar in fuel oil. Private stocks are down 2.3 million barrels from this time last year, but the federal government's Northeast Heating Oil Reserve is at its legal maximum of 2 million barrels. Private plus public reserves thus nearly equal the level of private reserves at this time last year.

What this means, of course, is that sometime in the next five months we are almost surely going to see a significant release of crude and/or fuel oil from US government inventories. If gasoline prices in the US stay below $2/gallon (the national average is now $1.92/gal.) I think it unlikely that we'll see it before the election. Of course, if Dubya gets massacred in the upcoming debates, all bets are off.

Monday, September 27, 2004

For those of you keeping track at home, I am proud to announce that General Glut is the newest economics blogger for The American Street. It's a chance to spread the deflationary anti-gospel1 to thousands more across the blogosphere. My first posting in on the flagging US housing bubble. If you're a Globblog regular, this is old news, but stop by anyway. I get to post graphics over there!

1"Gospel" meaning, of course, "good news", an anti-gospel would be "bad news". FYI.

If it's Monday, it must be Nigeria.
Crude futures hit fresh record highs on Monday on concerns of supply disruptions in Nigeria where rebels are threatening an uprising in the oil producing region.

Royal Dutch/Shell Group said it had shut up to 40,000 barrels per day of oil production for security reasons. The company said it was still pumping about 1m b/d.

Front-month Nymex WTI hit a fresh record high of $49.74, up from its settlement on Friday of $48.88. IPE Brent crude for November delivery also hit a record high at $46.25 a barrel in early afternoon London trade, before easing to $46.11, a rise of 78 cents on the day.

Speculative funds have doubled their net long position in the Nymex crude contract from 13,198 contracts to 26,742 contracts in the week to September 21.
As turmoil returns to the global oil market, the speculators descend on the carcass like vultures. $50/barrel in New York seems assured now. Do I hear $55?

Here's a little mystery to ponder.

Everyone is puzzling over the strange conjunction in the US of rising Fed rates and falling long-term rates. As the Fed raised the federal funds rate from 1.00% to 1.75%, the interest rate on 30-year fixed rate conventional mortgages fell from 6.32% to 5.70% today. Rather than see this strange set of events as a big sign of "no confidence" from the bond market, the rah-rah crowd thinks sees assurance of low interest rates into the infinite future and with them robust economic growth over the rainbow. Economists are even predicting yet another round of home refinancing if the 10-year goes below 3.75% (it's hovering around 4.00% now), yet more fuel for an already out-of-control housing bubble in places like California.

Things look pretty different in the UK. There, rising Bank of England short-term rates have had all the expected knock-on effects for long-term rates. The BoE's repo rate stands at 4.75%, up from 3.50% late last year. Variable rate mortgages are up as well in Britain, from 5.00% last summer to 5.75% today. The quick demise of the UK housing bubble has followed predictably in tow.

So why the "normal" relationship between short-term and long-term rates in the UK but an "abnormal" relationship in the US? That's the $64,000 question.

Here's a guess: massive Asian capital flows to the US are flooding the domestic US market with cheap credit, driving down interest rates and completely negating the effects of Fed tightening.

Let's compare the US and the UK. In 2004:I the US current account deficit was 5.1% of GDP (and growing rapidly as we all know). For the same quarter, the UK current account deficit was just 1.9% of GDP. In addition, we know that the US financial market is not simply a national one but a transnational one thanks to what many call the "dollar bloc" linking the US to East Asia. The effect is that a growing US money supply leaks into Asia, keeping inflation down. In reverse, a shrinking US money supply can import from Asia and thus keep interest rates down. The British pound has no such release valve. Being an overwhelmingly national currency (only about 5% of international reserves are held in sterling), nobody is gobbling up pounds or UK government bonds like discounted Halloween candy. Tie this onto a flagging US economy and a cash-flush US corporate sector and you get credit supply far exceeding credit demand, a wonderful recipe for falling long-term interest rates in the US.

Is this a cause for celebration? Hardly. It simply exacerbates current unsustainable trends such as the US federal budget deficit and our current account deficit as well as spraying toxic "refi" fumes into the American home-owner's paper bag for yet one more huffing binge of equity-withdrawal consumption.

This is simply speculation so far, but there is a logic here worth pursuing.

Sunday, September 26, 2004

Consider this an Israeli test balloon.
A suspected military commander of Hamas was killed when his booby-trapped car exploded in Damascus on Sunday and the Palestinian militant group accused Israel of carrying out the assassination.

There was no official acknowledgement by Israel that it was involved in the death of Izzedin Sheikh Khalil. However, Israel's Channel-2 television on Sunday night quoted unnamed security sources as saying Israel was behind the bombing.

Syrian officials also pointed the finger at Israel. Ahmad Haj Ali, an adviser to the Syrian information minister, told Associated Press: "This is not the first warning Israel has tried to convey to Syria. What happened indicates that Israel's aggression has no limits."
If the Bush administration backs Israel 110% on assassinations in foreign countries and Syria simply rolls over (while bitching and complaining all the while, of course), it looks like a diplomatic green light for bombing Iran.

Friday, September 24, 2004

The UK housing market finally began to cool down in August when monthly housing prices fell for the first time in two years. The data show that the US housing market was still rip-roaring ahead in the second quarter, but the turnaround in prices may finally be upon us.
The pace of home sales slowed down in August, according to an industry report Friday, as the latest reading on the market came in weaker than Wall Street forecasts.

The National Association of Realtors report showed existing home sales at a 6.54 million annual pace in the month, down from the 6.72 million annual sales pace in July. Economists surveyed by Briefing.com forecast that the sales would fall to a 6.65 million annual pace in the most recent period.

The group said that while the sales have slowed, they are still near historically high levels.

"Since April we've experienced three out of the four strongest months on record for existing-home sales, and August was the sixth highest," said David Lereah, NAR's chief economist, in a statement. "We're at a more sustainable level now, but long-term there should be some additional easing toward the end of the year. In fact, the August sales pace is close to what we project for total sales this year."
Lereah isn't being honest about his own report. On the question of sustainability, August home sales (SA) fell most in the Midwest (-4.3%), the least frothy region of the country. Sales in the newly re-bubbling Northeast didn't fall at all, and in the completely out-of-control West they were only -1.6%.

A telling statistic, however, is the fall in home prices at the regional level in August. In the Northeast the median price changed -0.8%; in the South, -0.3%; in the West, a big -2.4%! Since June, median prices in the South (which of course includes Florida) are -2.1%.

Now of course, one month does not a trend make, and the regional data obscures what is going on in particular metropolitan regions (which is the most relevant scale for housing prices), but we do have a most interesting picture in three of the four regions of the country where demand is falling at the same time that prices are falling. The Australian housing bubble seems to have stopped inflating when first-time buyers were completely squeezed out of the market. Only time will tell if this is the beginning of the end for the US bubble as well.

Highlights from today's edition of Stephen Roach's musings. In short: US slowdown + Chinese overheating + oil shock = bad economic news.
. . . I believe it�s appropriate to reinstate my warning of a 40% chance of US and global recession in 2005. . . .

I have long argued that the macro impact of any [oil] shock depends critically on context. A rapidly growing economy has a built-in cushion of resilience that enables it to ward off such blows. A slowly growing economy does not. That�s certainly been the experience in the US. . . . Today�s growth climate is strikingly reminiscent of pre-shock stall speeds of the past. . . .

With the Fed now back in a tightening mode and with the personal saving rate having recently plunged back through the 1% threshold, the case for sustained exogenous support of an overly-indebted, income- and saving-short American consumer is weakening. . . .

In an unbalanced global economy, America�s soft patch is the world�s soft patch. . . .

What I find interesting and somewhat disconcerting about China�s tightening campaign is the reluctance to rely on the traditional policy instruments of a market-based economy, such as the currency and now interest rates. Instead, Chinese authorities have relied far more on the administrative edicts that have long been at the heart of a centrally planned economy � namely, industry-specific constraints on the quantity of credit and project finance. . . .

Lacking in alternative growth engines and now facing the risks of a shock, financial markets have good reason to sound the alarm for another growth alert.

Thursday, September 23, 2004

Things are going from bad to worse in Haiti.
Hungry, thirsty and increasingly desperate residents of Gonaives, Haiti, burned tires in protest and attacked each other in a panic to get scarce food and water Thursday as workers struggled to bury hundreds of victims of Tropical Storm Jeanne.

More than 1,100 were killed, 1,250 were missing and the toll was still rising Thursday, six days after the storm hit. . . .

Some residents had grown so desperate to get rid of putrefying corpses they were burying them in their backyards.

Health workers feared an epidemic from the unburied bodies and animal carcasses, overflowing sewage, lack of potable water and infections from injuries.

. . . About 250,000 were left homeless in Haiti's northwest province, which includes the port of Gonaives. . . .

"We need surgical masks, water and food," said Frantz Bernier, who was burning tires to protest the lack of government help. "We don't have anything."
If you could spare twenty bucks (or more), the people in Haiti could really use all the help they can get.

I just found out today that Roman Totale owns 2500 shares of the Globblog, one share of the Globblog is worth B$117.46, and my p/e ratio is 63.39 (makes me sound pretty overvalued, doesn't it?).

Most importantly, I have no idea what any of this means.

Hmm, that "soft patch" out there in the yard seems to be spreading. Thankfully the gardener tells me not to worry, we just don't get moles around these parts . . .
A closely watched index of future economic activity fell 0.3 percent in August, the third consecutive monthly decline, the Conference Board said.

The research firm's index of leading economic indicators, forecasting activity in the coming months, dipped to 115.7, a reading weaker than expected on Wall Street.

"The leading indicators continue to soften," said Conference Board economist Ken Goldstein. "There is concern about weak consumption and the pace of wage and salary increases."

Both consumers and businesses are showing caution, the economist said.

"Consumers worry about their wages and salaries, which could limit spending," said Goldstein. "Businesses worry about their ability to raise prices and to cover rising costs."
The main reasons the leading indicator fell again were bad news on the interest rate spread and building permits. The interest rate spread between the 10-year and the federal funds rate was down to 2.85% in August; it was 3.70% in June. Building permits also fell markedly, by 5.5%.

The leading index had been on a steady incline for about a year before these three declines in a row. And lo and behold! the US economy grew pretty well from 2003:I to 2004:I, and then -- the "soft patch".

If your soft patch is indeed the first sign of mole tunnels, tamping them down and throwing on some aggregate isn't going to help matters. Neither is wishing them away. I'm pretty sure the tooth fairy doesn't do exterminations.

I feel like I'm clairvoyant. No sooner did I say not to count out Dubya tapping the Strategic Petroleum Reserve than Scott McClellan is talking about it at today's press gaggle.
White House spokesman Scott McClellan said on Thursday the Energy Department was reviewing requests from refiners to borrow small quantities of oil from the Strategic Petroleum Reserve.

"(An SPR release) would have an initial impact," said Jim Ritterbusch, president of Ritterbusch and Associates. "But I wouldn't be surprised to see the market rally after the news is out."

The last time Washington loaned oil from the SPR was in late 2002 when Hurricane Lili disrupted shipments into Gulf Coast distribution hubs.

The White House has said it would not withdraw oil from the 670 million barrels reserve, held in underground salt caverns at four sites in Louisiana and Texas, except for a severe supply disruption.

Last month, Vice President Dick Cheney defined such a disruption as the loss of 6-5 million barrels per day (bpd) in U.S. imports. The United States imports about 11 million bpd of crude and petroleum products.
Now this hardly qualifies as the beginning of the spigots being thrown open, but it's a start.

Since I'm on the topic of housing prices today, it's about time I blogged the second quarter data from the National Association of Realtors.

You may recall that I said back in early July that "California is bubblicious", with five of the state's six metro areas experiencing annual median home price inflation of over 20% (and San Francisco just behind at 17.3%). Believe it or not, the state become even more bubblicious in the second quarter. And when I say more, I mean a hell of a lot more. Crazy more. Totally unsustainably more. Quarterly percentage changes are annualized.

Metro area / 2003:IV-2004:I / 2004:I-II

San Diego -- 23.0% -- 63.5%
Orange County -- 34.7% -- 57.9%
Riverside-San Bernardino -- 32.6% -- 55.0%
Los Angeles area -- 11.9% -- 47.3%
Sacramento -- 24.7% -- 43.9%
San Francisco -- 18.2% -- 31.2%

Notably, the relative moderation of the LA and Bay Area markets in the first quarter has been totally swept aside in the second, while the ultra-frothy markets have shot into the stratosphere. And don't forget the Northeast, where housing inflation is returning with a vengeance. Again, these quarterly figures are annualized.

Metro area / 2003:IV-2004:I / 2004:I-II

Baltimore -- 4.2% -- 57.4%
Boston -- -8.2% -- 22.4%
New York/N. New Jersey/Long Island -- 15.8% -- 25.5%
Philadelphia -- -1.2% -- 67.1%
Providence -- -1.3% -- 36.8%
Washington -- 11.8% -- 68.8%

Now all these figures must be taken with a grain of salt since they are not seasonally adjusted. Nonetheless they show some remarkable ballooning price levels. For a broader picture, check out the annual numbers.

Across the United States there are five markets which had annual (2003:II to 2004:II) housing price inflation of over 30%. Four of them are in California: Orange County (38.7%); Riverside/San Bernardino (38.5%); San Diego (37.5%); and Los Angeles (30.4%). The number one slot belongs to next door neighbor Las Vegas, at an unbelievable 52.4%. By comparison, the 20-25% annual increases across Florida and in Baltimore and Washington look tame.

As as I warned back in the early summer, the use of adjustable rate mortgages (ARMs) is fueling this fire. The below list is of the percentage of new conventional home mortgages taken out on adjustable rates by quarter.

Metro area / 2003:IV / 2004:I / 2004:II

Las Vegas -- 26% -- 36% -- 51%
Los Angeles/Long Beach/Riverside -- 44% -- 45% -- 55%
Sacramento -- 50% -- 47% -- 64%
San Diego -- 61% -- 59% -- 67%
San Jose/San Francisco/Oakland -- 57% -- 56% -- 66%

Of course, the bond market is telling us the era of ultra-low interest rates is here to stay. Clearly home-buyers believe it, regardless of what the Fed is doing. Californians had better hope the actions of Greenspan & Co. simply don't mean a thing.

For those of you following the UK housing market, you know that prices finally began to fall in August after years and years of blistering inflation.



If you live in California or Florida, or even parts of the Northeast, you know all about the first part. You may also become all too familiar with the second part as well.

The 125 basis point rise in British interest rates over just ten months -- from 3.50% in October 2003 to 4.75% in August 2004 -- has done its work, dramatically cooling off the bubbling UK housing market as intended. The IMF has been warning us about the feverish housing markets in the UK, US, Australia and several other countries for a year-and-a-half now, and in the latest issue of World Economic Outlook, the Fund tackles the issue again.

According to the Fund, "house prices are . . . synchronized across industrial countries," and that's why what happens in the UK or Australia is important both for the global economy and for the US, the giant commodity-and-capital vacuum for the planet. Britain is particularly important since it is such a large economy (seventh in the world, second in Europe) and has seen the second largest rise in housing prices in the world (after Ireland) over 1997-2003.

British housing stocks are being hit hard now that everyone recognizes the Big Slowdown in the UK housing market is here -- and the Big Drop-off may be none too far away.
Housebuilders were hit after two of the country�s largest property sellers warned of a softening UK housing market. Countrywide lost as much as 15 per cent after its second warning on the cooling UK housing market in five weeks. It said that full-year results would be below expectations, as the number of transactions and business volumes slowed compared to a strong August 2003. At the same time, Countryside Properties also said demand had slowed, particularly for lower priced homes in the South-East and London.
In the Fund's words, "the growth rate of real house prices in the United Kingdom is forecast to slow down significantly, and a fall in real house prices cannot be ruled out." It is more sanguine on the future of the US housing market, but this is based on national computations which are mostly meaningless for the heterogenous and segmented US housing market. While things may be fine in St. Louis and Minneapolis, they might not look fine at all in San Diego and Miami. Notably, the Fund throws in this caveat:
In cases where house prices may have exceeded fundamentals -- which may include Australia, Ireland, Spain and the United Kingdom [ed. -- and should include the most frothy markets in the US] . . . there is a danger that higher interest rates could trigger a much larger downward adjustment in house prices, with considerably more severe consequences for real activity.

Wednesday, September 22, 2004

Two underappreciated political blogs added to the General's Hall of Honor:
Fester's Place

Elementropy

Don't think we won't yet reach $50/barrel.
Oil prices hovered just below $47 a barrel Wednesday, awaiting a U.S. report that was expected to show a big drop in fuel stocks after Hurricane Ivan disrupted operations.

Meanwhile, U.S. light crude for November delivery rose to a peak at $47.04 a barrel, just $2.36 off the all-time high at $49.40 struck Aug. 20 before easing back to $46.70. London Brent for October delivery fell 14 cents to $43.25 a barrel.

Meanwhile, heating oil futures bubbled at record levels as concerns grew that stocks of heating fuels in Japan, the United States and Europe could prove inadequate for the upcoming northern hemisphere winter.

"We are very worried by heating oil supplies in Japan, the United States and Europe," said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo. "Another attack on the record at $49.40 is possible over the next few months."

Industry analysts are expecting U.S. crude inventories to drop by a hefty 5.5 million barrels for the week to Sept 17 when the government Energy Information Administration (EIA) releases its weekly oil report at 10:30 a.m. ET Wednesday.

It would be the eighth crude draw in as many weeks and would take stocks to a deficit of more than eight million barrels versus the same time last year.
Ten minutes until release . . . I'll update soon on what the EIA has to say.

UPDATE: For the week (year) ending 9/17, crude oil stocks -3.3% (-4.9%); gasoline, -1.4% (+1.8%); fuel oil, -1.2% (-1.8%). In the EIA's words, "At 269.5 million barrels, U.S. crude oil inventories are well below the lower end of the average range for this time of year." The Strategic Petroleum Reserve continues to grow, however, up 0.1% for the week and +7.8% from a year ago. Don't count out Dubya tapping the Reserve before Election Day just yet.

Yesterday some of the regular commenters at AngryBear got into an animated debate trying to answer PGL's question:
why is the United States not exporting more to China as it appears we are suffering from weak exports
In response, here's what the General said:
From 1999 to 2003 US goods exports to China were up 116%, averaging growth of about 21% per year. In 2003 export growth was 28% and so far this year, +35%!

The problem isn't China importing too little from the US, it's the US importing too much from China.
DOR weighed in with some additional data:
In the last two years (eight quarters to end-June 2004), US merchandise exports (NSA) rose 0.6% from the previous four quarters, a rise of $8.28 billion.

Exports to China rose 50.3%, or by $19.27 billion. Yep, 2.3 times as fast as overall exports (sales to Western Europe and Japan together dropped $21.61 billion).

In the past two years, China has been the US most important export growth market, beating even Canada (+3.7% or $12.26 billion).

So, on this point I agree with General Glut. However, I do not get the notion that the US is importing too much from China. If not from China, from which more expensive source should we buy? And, why is the source country even an issue?
DOR (and PGL) frame their questions as determined free-traders and thus miss the larger point on the relationship between the US and China. From 1999 to 2004 (Jan.-July only) US merchandise exports to China are growing rapidly, up +169%. This is even faster than the growth of merchandise imports from China, up "only" 140% over the same period. The problem, of course, is that the US imports over five times as much from China as it exports to the country. That's down from 6.2 times as much in 1999, but still generates massive trade deficits which in dollar terms continue to grow and grow. So far in 2004 the US trade deficit with China is two times larger than its deficit with Japan and over three times larger than the deficit with Germany.

If one thinks the trade balance with China is a problem, then it is impossible to conclude that the US 'does not export enough' to China. The US imports too much.

Now we come to DOR's question: "If not from China, from which more expensive source should we buy? And, why is the source country even an issue?"

Consider how the US "affords" to buy so much from China: gargantuan purchases of US government bonds by the People's Bank of China. Recall that as the US current account deficits have become truly enormous since 2002, foreign capital coming into the US has turned away from stocks and FDI and almost wholly towards bonds, especially government bonds. The US truly will pay tomorrow for consumption today (unless the US decides to inflate away all its debts -- a marked possibility frought with all kinds of danger). For a more involved discussion, see my comments from last Tuesday.

And what does the US buy from China in such amazing quantities? So far this year the two biggest categories, constituting over 80% of US imports from the country, are [1] machinery and transport equipment and [2] miscellaneous manufactured articles. Within category [1] it's really about computers and telecommunications equipment; within category [2] it's furniture, clothing (including shoes) and "miscellaneous manufactured articles" the majority of which I suspect is toys.

So, if the US is to tackle the #1 cause of its current account deficit (recall, it hit 5.7% of GDP in 2004:II), we need to buy fewer of such items from China or buy the same amount at higher prices. Are you going to tell me that the US can't make furniture or textiles (tell that to North Carolina)? That the US cannot "afford" to pay a little more for imported shoes and toys? That our computers are still not cheap enough? That the US cannot even manufacture telecommunications equipment anymore?

Of course, the real wrench in the whole machinery is that the increasingly unequal US economy is becoming desperately dependent on Wal-Mart to lull the American working class into acquiesence. Without ultra-cheap stuff through Wal-Mart (from China), the wool will truly be removed from our eyes and we will see the robber barons as they truly are.

Tuesday, September 21, 2004

So, how long before Israel conducts a military strike on Iranian nuclear facilities in Bushehr, Natanz, Arak and/or Parchin? Learn the names and watch the recipe come together.
Iran today defied international calls for it to end fuel manufacture, announcing that it had begun preparing uranium ore for enrichment.

Gholamreza Aghazadeh, the head of Iran's Atomic Energy Organisation, said the country - which maintains it has no military ambitions for its nuclear programme - was converting 37 tonnes of raw yellowcake uranium into a state suitable for nuclear centrifuges.

"The tests have been successful, but these tests have to be continued using the rest of the material," he told reporters at the general conference of the Vienna-based International Atomic Energy Agency, the UN's nuclear watchdog.

Iran had told the IAEA it intended to begin tests of its uranium conversion facilities, but today's announcement came less than 48 hours after the board of governors passed a resolution calling on Iran to halt all activities linked to enrichment. The US, the EU and Russia yesterday urged Tehran to comply with the demand.

Mohammad Khatami, Iran's reformist president, had earlier restated his country's opposition to calls to end enrichment, saying Iran was prepared to continue its nuclear programme either with or without international supervision.

His comments - an endorsement of Tehran's threat to pull out of the nuclear non-proliferation treaty - indicated that reformers were as committed to pursuing a nuclear programme as hardliners.
Now fold in this from today's New York Times.
A final unpredictable factor in the discussions involves Israel, which some intelligence experts say would be willing to strike one or more Iranian weapons sites, as it did with the French-built nuclear reactor in Iraq in 1981.

Israeli and American officials insist that the idea of a strike against Iranian sites is impractical. Nevertheless, some diplomats were rattled by a recent warning from Iran's defense minister, Vice Adm. Ali Shamkhani, that Iran would retaliate if Israel tried any such thing.
Next, add the following story from Ha'aretz. Mix well.
The United States will sell Israel 5,000 smart bombs for $319 million, according to a report made to Congress a few weeks ago.

The funding will come from the U.S. military aid to Israel [ed. -- so the US is giving the bombs to Israel, not "selling" them] . . .

Among the bombs the air force will get are 500 one-ton bunker busters that can penetrate two-meter-thick cement walls . . .

An unidentified senior Israeli security official said, "This is not the sort of ordnance needed for the Palestinian front. Bunker busters could serve Israel against Iran, or possibly Syria," according to Reuters.
Finally, stir in some additional word from Reuters. Turn oven to 375 degrees.
Mounted on satellite-guided bombs, BLU-109s [aka bunker-busters] can be fired from F-15 or F-16 jets, U.S.-made aircraft in Israel's arsenal. This year Israel received the first of a fleet of 102 long-range F-16's from Washington, its main ally. "Israel very likely manufactures its own bunker busters, but they are not as robust as the 2,000-pound (910 kg) BLUs," Robert Hewson, editor of Jane's Air-Launched Weapons, told Reuters.
If I knew you were coming I'd have baked a cake.

According to Real Clear Politics, a web site that tracks all the state-level polls, the current Electoral College vote is:

Bush 284
Kerry 200
Toss-up 54

Of course, you only need 270 to win.

The bottom line from Real Clear Politics: "Kerry simply has to win either FL or OH. If Kerry does not win either FL or OH, he has very little chance of becoming President. . . . If Kerry loses PA or MI he loses."

Kerry is currently down big in OH, down small in FL and tied in PA. He's also losing IA and WI. If Kerry loses IA and WI, he has to win PA, FL *and* one of the following: CO, NV, NM.

The scenarios for a Kerry victory minus FL are slim and getting slimmer. OH is gone; without FL, Kerry would have to run the table on this set of small swing states: WI, IA, MN, NM, NV, CO. Losing even one without FL would finish him off.

Winning FL but losing PA means Kerry could forego WI but must run the table on the rest of the small swing states.

In the real world, FL and PA are the mustest of must-win states, and even then Kerry needs a little help in either the Midwest or the West.

So, how are things going in Iraq? While we know the Bush administration isn't terribly fond of actual facts, let's see what these petty figures have to say to us.
Last month, the British Army fired 100,000 rounds of ammunition in southern Iraq.

The base in al-Ammara sustained more than 400 direct mortar hits.

The British battalion there counted some 853 separate attacks of different kinds: mortars, roadside bombs, rockets and machine-gun fire.

No British regiment has had such intense "contact", as they call it, since Korea.
And this is in the British sector, which is supposed to be benefitting from the Tommies more genial occupation. As the BBC notes, "There are no illusions about life in the British sector any more."

Thus sayeth the Organisation for Economic Co-operation and Development.
Growth of the US economy this year is likely to be 4.3 percent, the OECD forecast, lowering an earlier forecast of 4.7 percent.
Everybody and their brother and their brother's in-laws are climbing down from their exceptionally rosy predictions from six months ago, but 4.3% still seems pretty confident in the General's view. After all, 2004:II growth was a mere 2.8%.

If we experience even GDP growth over the next two quarters (an assumption for the sake of simplification), 2004:III growth will have to come in at a blistering 4.9% in order to stay on track for an annual rate of 4.3%. This is even at the top end of the very wide margin that the OECD has given itself, forecasting 2004:III GDP growth in the US to come in anywhere from 2.0% to 5.2% (there's a bold prediction).

Now remember the summer "soft patch". Remember the July trade deficit was the second largest on record. Remember the falling bond rates since June. Remember the weak August retail sales numbers. 4.9%? The OECD economists must not have come home to Paris from their August holidays completely sober.

If you think the US is teetering on the financial precipice, check out Australia (from yesterday's Financial Times, sub. only). Housing bubble, massive debt, huge current account deficits of over 6% of GDP, no savings, tax-cut driven consumption -- the Land Down Under has got it all.

One note on comparing the US and Australian balance of payments problems. As Roubini and Setser point out in their very good discussion on "The US as a Net Debtor," it is far easier for a small country which exports a significant amount relative to GDP to bear the burden of a large CA deficit. Australia's exports-to-GDP ratio is around 16-17% while for the US it is only 10%. Thus Australia can bear a heavier debt burden because it can more easily finance it through exports than can the US. Plus, the United States has the USD and its global role to worry about, while nobody is using the AUD to stock their reserves.

The "Lucky Country" is enjoying a remarkable streak. Australia's economy looks set to expand for the 14th year in a row, with gross domestic product forecast to grow by about 4 per cent in 2004.

The stock market is at a record high, having risen more than a third over the past 18 months, and a massive property boom - house prices have more than doubled since 1997 according to the Economist's house price index - has left Australians feeling richer than ever before.

But economic upswings do not last forever and Australia's boom is starting to show parallels with the final stages of the US technology bubble of the 1990s. As in the US, consumer spending has been the main motor of the economy - final domestic demand has been rising at 5-6 per cent in real terms over the past few years, faster than overall GDP. This household spending has been driven by real estate rather than stock market gains, as was the case in the US, but the wealth effect has been the same.

In some respects, Australians are even out-doing Americans in their willingness to gamble with their financial health. The US household savings rate is still marginally positive, while Australia's stands at minus 3 per cent. Equity withdrawals from property are running at twice the US level and household debt averages 150 per cent of household incomes, compared to 120 per cent in the US.

Inevitably, Australian consumers, like their American counterparts, will have to start deleveraging at some point and that will hit their ability to spend, and hence overall growth. The pre-election budget in March, which included record tax cuts and give-aways, might delay this for a quarter or two, but no longer. Although there is no single definitive measure, house prices - on which the whole boom has been built - probably peaked at the end of 2003. Already, car sales are falling and retailers are increasing their discounting to keep volumes up.

This will have a disproportionate effect on equities. Although Australia is often still perceived internationally as "a mine with a farm attached", it is a modern service economy, says Gerard Minack, Australian strategist for ABN Amro. Mining and farming each contribute just 5 per cent to GDP and resource companies make up 15 per cent of the stock market, while financials are at 42 per cent. The latter have been growing their earnings at more or less double-digit rates for the past decade and if they slow down that will far outweigh the positive effects of China's demand for commodity imports and a weaker Australian dollar.

How bad will the downturn be? In its favour, Australian valuations, with a prospective price/earnings ratio of 15 times, have not reached the crazy levels of Nasdaq. And corporate, as opposed to personal, balance sheets are much more solid than they were in the US at the end of the 1990s.

On the other hand, Canberra is liberally distributing the budget surplus in the good times, giving it less flexibility to cut taxes and stimulate demand than the Bush administration. With a supportive White House and an ultra-accommodative Federal Reserve, America's exit from its bubble has probably been managed about as well as it could have been. Yet four years later, the S&P 500 is still a quarter below its peak in the spring of 2000. Australia will need all its luck to deflate as gently.

Monday, September 20, 2004

From Anthony Cordesman in today's Financial Times (sub. only):
Virtually without fanfare, the Bush administration has reprogrammed about $3.5bn in aid funds to Iraq in ways that mark a fundamental shift in strategy - and a recognition that much of the US effort in the first year of occupation was a failure.

The administration sent a proposal to Congress last week to reprogramme $3.46bn of spending on Iraqi water, power and other reconstruction projects. Some $1.8bn of that will go toward accelerating the training and equipping of Iraqi police and security forces. In an equally crisis-driven fashion, the rest will be spent on securing and boosting oil exports, creating jobs and providing immediate aid benefits of the kind that could support the elections scheduled for January. Only about $1.2bn of the $18.4bn of US aid funds programmed for the 2004 fiscal year has been spent, and less than $600m has been spent in Iraq. Much of that has been wasted because of sabotage, attacks and bad planning; or has been spent outside the country; or has gone to foreign security forces.

The reprogramming request does far more than shift money. It is a recognition that Paul Bremer, the former US administrator in Iraq, the Coalition Provisional Authority (CPA) and the US military got the first year of the Iraq occupation fundamentally wrong. It is also a de facto recognition that the neo-conservative goals set for restructuring Iraq can never be achieved.
Well said.

Today the venerable nay-sayer Stephen Roach tells us we don't simply have "twin deficits" to worry about, because -- congratulations! -- the US economy is now mother to triplets!
The elephant in the room that the politicians continue to sidestep is the profound shortfall of national saving � the sustenance of future growth and prosperity for any economy. The numbers speak for themselves: The net national saving rate � the combined saving of households, businesses, and the government sector � fell to a record low of 0.4% during 2003 and has since rebounded to only 1.9%.

. . . Lacking in domestic saving � but still wanting to grow in a world where saving always equals investment � the US must import surplus saving from abroad. That means America has no choice other than to run large current-account and trade deficits to attract that capital. . . .

America�s current-account and trade deficits are tied directly to government budget deficits and the lack of personal saving. America no longer has a �twin deficit� problem � it has an even more worrisome �triple-deficit� dilemma.
While Roach is correct that the US does have a terrible trio of deficits, he is off the mark by finding in the lack of savings the ultimate origin of our troubles. The US doesn't run massive trade deficits in order to attract foreign savings to the country. The massive trade deficits are a result of massive importing in combination with a strong dollar. The US isn't running trade deficits to import capital. It is importing capital to run trade deficits.

Does the US not have "enough" capital? It depends on what you want to use it for. The US has more than enough capital for purposes of productive investment. US corporations are flush with cash but don't know what to do with it. We don't have a shortage of investment capital but rather a shortage of consumer demand to justify big new capital investments. The truth is that the US doesn't have "enough" capital to run its massive budget deficits.

What if you simply raised taxes in the US, thus funding more of the budget domestically? This should be an option since personal current taxes plus contributions for government social insurance have dropped dramatically from 23.4% of income in 2001:II to only 19.2% in 2004:II. However, because personal savings have fallen so low, any effort to institute anything more than a cosmetic advanced towards a "pay as you go" system for the federal budget will necessarily cut into consumption. In 2004:II raising another $100bn in taxes, for example, would cut the deficit almost by a quarter but completely consume all domestic savings. That is, our savings rate would be 0.0%, and the US would still need to import capital from abroad. At our current level of income, spending cuts will have to be a big part of the equation.

What happens if the US become "virtuous" per Roach and dramatically lifts its personal savings rate? In light of relatively slow-growing incomes, consumption will necessarily fall. Exports are not going to allow us to simply increase incomes painlessly. Asia knows this and wants to avoid the Day of Reckoning as much as we do. So they loan us money to boost our consumption, both [1] by freeing up consumer dollars from taxation by financing the budget deficit and [2] by propping up the value of the dollar.

But telling the average American that the problem is that they consume too much is not likely to go over well, partially for reasons of personal interest but also because that definition may in fact be patently false. But so far all the liberal economists have to say to us, from the bearish Roach to the bullish Greenspan, is that Middle America is a spendthrift wastrel that needs to be disciplined by the market.

Hear the death rattle?
The Russian oil giant Yukos said on Sunday that it would immediately reduce some of its rail exports of crude oil to China. It appears to be the first time that Yukos's ability to transport oil has been affected by its tax dispute with the government, which has frozen most of its bank accounts.
Recall that way back in late July the Washington Post played out Yukos' death scenario with the first step being the end of rail shipments of oil to China. After that comes an end to production in its Tomsk fields -- 25% of Yukos' overall production -- as on-site storage facilities fill up.

In response, NYMEX oil prices are back up over $46/barrel this morning. "Soft patch," my ass.

A Portrait of the Air-tist as a Young Man.
a wider examination of his life in 1972, based on dozens of interviews and other documents released by the White House over the years, yields a portrait of a young man like many other young men of privilege in that turbulent time - entitled, unanchored and safe from combat, bouncing from a National Guard slot made possible by his family's prominence to a political job arranged through his father.

In a speech on Tuesday at a National Guard convention, Mr. Bush said he was "proud to be one of them," and in his autobiography he writes that his service taught him respect for the chain of command. But a review of records shows that not only did he miss months of duty in 1972, but that he also may have been improperly awarded credit for service, making possible an early honorable discharge so he could turn his attention to a new interest: Harvard Business School.
And let's not lose sight of the real importance of this story. The entire history of George W.'s life has been one major fuck-up after another, with Daddy or Daddy's friends or Karl Rove or the American public showing up to pull his fat out of the fire. W. is a reckless loser who lacks all sense of personal responsibility and makes innocent bystanders pay the consequences for his mistakes.

Billions "served" since 1946.

Friday, September 17, 2004

They want our bonds! We want their savings!

Consider this a helpful factoid from the second quarter US International Transactions data. Sorry, no USA Today-like graphics.
Net purchases by foreigners, 2004:II

Stocks -- $2.0bn

Direct capital investment -- $32.7bn

Corporate bonds -- $51.5bn

Federal agency bonds (private) -- $35.1bn
Federal agency bonds (govt) -- $2.8bn
US treasuries (private) -- $40.3bn
US treasuries (govt) -- $63.0bn
Do not accustom yourself to consider debt only as an inconvenience. You will find it a calamity.
- Samuel Johnson

Apparently, a $22.3bn quarterly current account surplus with the US just isn't good enough for Japan.
The yen lost ground in European morning trade on Friday as the market received a reminder that the Japanese authorities may not tolerate future currency strength.

Japan�s ministry of finance instructed the Bank of Japan to spend Y20bn to stop the yen from appreciating in 2003, and a further Y15bn in the first three months of 2004. Since March the pick-up in US rate expectations has allowed the yen to soften against the dollar, the main exchange rate targeted by the Tokyo authorities.

However Zembei Mizoguchi, who conducted much of the intervention in his previous role as vice finance minister for international affairs, said that despite the hiatus since mid-March, intervention had not ceased, and could resume in case of excessive volatility and disorderly moves.
The levels of Japanese intervention in currency markets are astounding, and in light of both the suddenly sluggish Japanese recovery and the insatiable US appetite for foreign savings, looks to continue unabated.

In 2004:II the US sent $12.4bn in investment income to Japan (a net income balance with Japan of -$7.7bn). The gross figure was a record by a long shot, topping by over 20% the previous high water (or is that low water?) mark of $10.3bn set in the first quarter of this year. For the year, the income balance with Japan stands at -$13.4bn. The standing annual record with the country is -$24.3bn set all the way back in 2002.

Even in real terms, we're on a record-setting pace.

Thursday, September 16, 2004

Wow, just as world events are starting again to turn decisively against Bush, the latest polls make him look set for victory in November.

Florida: RCP Average | 8/20 - 9/14
Bush 48.4
Kerry 46.2
Nader 1.8

Bush +2.2

Ohio: RCP Average | 9/4 - 9/13
Bush 51.3
Kerry 43.3
Nader 1.7

Bush +8.0

Pennsylvania: RCP Average | 9/4 - 9/12
Bush 48.3
Kerry 47.5
Nader 2.0

Bush +0.8

And now for the shocker . . .

New Jersey: RCP Average | 9/3-9/14
Kerry 43.7
Bush 44.7
Nader 2.0

Kerry +1.0

Kerry is slightly down in Florida and way down in Ohio. He's running even in Pennsylvania and amazingly also in New Jersey, where the latest SUSA poll actually puts Kerry down 4 points -- in New Jersey?!?!

New Jersey is supposed to be a gimme state for Kerry. Kerry down in New Jersey is like Bush being down in Georgia. While this poll is most likely garbage, at least it shows that the race is incredibly tight in a state about which Kerry shouldn't have to even think once, much less twice.

Before the primaries, the three big swing states were supposed to be MO, OH and FL. Now it looks like Bush has already wrapped up both MO and OH and even put Kerry must-win states like PA, NJ and MN into play, as well as stealing WI from him. Kerry will take back NH but traditionally Democratic WV seems gone for good. Kerry is in striking distance of NV and CO, but it is really looking like FL is the must-win state for him.

Without Florida, Kerry has to hang on to PA and NJ as well as cobble together MN, WI and CO (273 EVs). MN, WI and NV (269 EVs, a tie going to the House where Kerry loses anyway) or MN, CO and NV (268 EVs) just aren't good enough. Since Kerry is really falling behind badly in WI, it's really all about Florida. Without Florida, the combinations necessary for a Kerry win are about as likely as a current account deficit under $600bn this year -- i.e. nada.

In case you haven't seen it yet, John Quiggin at Crooked Timber had a nice posting on the US current account deficit yesterday with an interesting policy suggestion to attack it. There are ample comments after the post which you should read as well.

How long until the word "deflation" returns to the business pages?
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in August, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The August level of 189.5 (1982-84=100) was 2.7 percent higher than in August 2003. . . .

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) was unchanged in August on a not seasonally adjusted basis. The August level of 110.3 (December 1999=100) was 2.1 percent higher than in August 2003.
While the media runs about crowing how this means the Fed can hold off on its interest rate hikes, it is not looking at some pretty interesting trends of late which take us right back to the deflation-scare days of late 2003.

After seasonally-adjusted monthly overall inflation jumps earlier this year of 0.5% (Jan. and March) and 0.6% (May), things have cooled down considerably. The two lowest monthly price rises of the year have occurred in the past two months. After peaking in June at 3.2%, the annual inflation rate is now down to 2.7%. Catching the more recent trends, the seasonally-adjusted CPI over the last three months is up a mere 0.3%, the lowest level since December 2003. The compound annual rate for the 3 months ending August 2004 is but 1.3%.

After holding steady for four months, the seasonally-adjusted core inflation rate is beginning to fall as well, to 1.7% in August. The core CPI compound annual rate for the 3 months ending in August is down to 1.0%, again a level not seen since the deflation-scare days of Fall 2003.

Food prices are finally beginning to fall, in response to a summer-long collapse in raw foodstuffs and wholesale food prices. The CPI for food at home changed -0.2% in August. Commodities prices overall are sinking markedly, falling two months in a row. Commodities prices are at -0.6% since June, and for core commodities CPI is -0.4% since June. Amazingly, core commodities have experienced outright annualized deflation consistently since December 2001.

[As an aside, the annual inflation rate for new cars, one of my favorite bits of data, is now -1.1%. Since peaking in September 1996, new car prices in August have changed -6.3% in nominal terms; in real terms, it is a whopping -22.0%!]

Commodities are 40% of the CPI, and the US economy is positively waylaying the necessary underlying conditions for their domestic production. We import more and more (which tends to only exacerbate commodity deflation), driving up the current account deficit, borrowing from China and Japan to keep the cycle going, and stoking the bonfire for the inevitable conflagration.

Wednesday, September 15, 2004

There's a new interesting econ blog on the block:
Brad Setser's Web Log
The first post is from yesterday, on our favorite topic, the US current account deficit. Here's a tidbit/teaser:
The U.S. truely has become every bit as dependent on foreign central banks to fund our deficits as it is on Saudi Arabia for oil! I would be a lot more comfortable if the US was exporting more goods and services and fewer treasury bills.
General Glut wishes Setser's blog a long prosperous life!

Rumor on the street is that growth in manufacturers' inventories is good because it is a sign of optimism that sales will increase in the future. The flip side is that growth in retailers' inventories is bad because it is a sign of slumping sales. Today's new manufacturing and trade inventories and sales data for July tells a somewhat comforting story, but the broader picture is still one of concern.

Manufacturers' inventories (SA), 2004
January: +0.3%
February: +0.6%
March: +0.4%
April: +0.5%
May: +0.7%
June: +1.0%
July: +0.8%

Jan-July: +4.1%

Retailers' inventories (SA), 2004
January: unchanged
February: +0.7%
March: +1.2%
April: +1.3%
May: +0.1%
June: +1.2%
July: +0.6%

Jan-July '04: +5.2%

While July was certainly better than June, growth in retailers' inventories are heathily outpacing growth in manufacturers' inventories on the year. It turns out that retailers' inventories are also outpacing their sales by an even wider margin.

Retailers' sales (SA), 2004
January: +0.3%
February: +0.9%
March: +2.3%
April: -0.9%
May: +1.5%
June: -0.8%
July: +0.7%

Jan-July '04: +3.9%

April and June were particularly bad months for retailers in which sales tanked and inventories (predictably) soared. The August retail data released yesterday suggests we could see a repeat of April and June in the data to come.

You want to know why Kerry is losing Wisconsin?

Forget soccer moms and NASCAR dads. The most important demographic in these parts transcends gender and geography -- it's Green Bay Packers fans.

Both candidates are targeting them with the ferocity of a Brett Favre bullet, but only John F. Kerry has fumbled the name of the hallowed grounds on which the Packers play, the frozen tundra of Curly Lambeau Field.

At a campaign event last month, the Democratic presidential nominee called it Lambert Field -- a slip of the tongue carried on television, in papers throughout the state and on ESPN's Web site.

That's akin to calling the Yankees the Yankers or the Chicago Bulls the Bells. This is a place where Packers jackets often outnumber sports coats in church and thousands of fans wear a big chunk of yellow foam cheese atop their head with the pride of a new parent. President Bush's warning to terrorists is apropos to the passions of Packers fans -- you are either with 'em or against 'em.

"I got some advice for him," Bush told Wisconsinites a few days after the Lambert gaffe. "If someone offers you a cheesehead, don't say you want some wine, just put it on your head and take a seat at Lambeau Field."
Like it or not, Americans tend to vote for the guy they think is most like them. After all, half of the country can't even be bothered to vote, and most of the other half simply want to show up every four years and sleep through most of the rest. If the guy in the Oval Office is a stand-up straight-shooter who is "like me," they can carry out these bare minimum requirements with confidence.

And for God's sake, what American male doesn't know it's called Lambeau Field?? This incident makes Kerry look like a poseur, or revals him to be one.

Any start to a measured global climb-down off the ledge of the US current account deficit has to begin with a new relationship between the US and China. So far this calendar year, China accounts for 24% of the overall US goods trade deficit. By comparison, Japan contributes 14.6% of the overall US current account deficit (the BEA won't give overall current account stats for China).

The Bush administration (as did the Clinton administration before it) is happily sacrificing the US manufacturing sector upon the altar of the God Which Emerges from the East, namely ultra-low interest rates financed by Chinese and Japanese investment (mainly from central banks in US bonds). Any climb-down will require more Chinese consumption of US exports, less US consumption of Chinese exports, and less Chinese purchases of US government debt (and less government debt in toto).

The nice way to do this is perhaps on our horizon already, an upwards revaluation of the renminbi.
The Japanese yen rose on Wednesday on hopes of a revaluation of China�s renminbi. Such a move is seen as allowing the world�s second largest economy to accommodate a stronger currency.

After the record US current account deficit of $166.18bn announced on Tuesday, John Snow, US treasury secretary, said the deficit with China was �too large� and unsustainable. He reiterated it was critical to use flexible exchange rates in the global economy. This is seen as a dig at China with its currency pegged to the dollar and a prod for it to revalue.

The world�s most populated economy, whose rapidly rising demand for oil has driven crude prices to record levels, is attending the forthcoming G7 meeting as a guest.

�Snow�s comments put further revaluation pressure on China overnight and this can only increase ahead of the G7 meeting on October 1,� Adam Cole of RBC Capital Markets said.
A floating renminbi is only a negotiating point; it will not come to pass. In fact, a floating currency could throw the entire Chinese banking system into crisis, not good for anybody concerned. So a revaluation should be in the works.

But will it matter? A falling USD since 2002 has had contributed absolutely nothing to reducing the CA deficit, and all the talk about "lagged currency effects" is wearing desperately thin after 30+ months.

The second, less friendly, way of starting to reorient the US-China relationship is via US tariffs on Chinese goods. In fact, this method is probably more effective than the currency path, since through intrafirm trade transnational corporations can avoid the costs of currency fluctuations more easily than avoid a tariff. It also targets those sectors in the US purposely sacrificed (yes, it has been an intentional policy!) by the Clinton and Bush administrations -- light industrial manufacturing.

The General mentioned the other day that South Carolina has lost 17% of its production jobs in manufacturing since January 2001 and North Carolina has lost 22% -- the two states most affected by Chinese textile and furniture exports. Overall South Carolina is only just now even with its jobs numbers from 2001, while North Carolina is still down 2.8% of its jobs since 2001.

Plus, tariffs on Chinese textiles could give Latin America and Africa some breathing room. CAFTA and AGOA were supposed to help these regions of the world particularly through light manufacturing, after all.

Yes, the New York Times, the Washington Post and poor Matt Yglesias will scream "heresy". But I don't practice their religion.

It took them a day, but the mainstream press is finally coming around to letting us know a current account deficit at 5.7% of GDP is something to worry about.
The United States hit a record deficit of $166.2 billion last quarter in trade and capital flows with the rest of the world, the Commerce Department reported Tuesday, raising fresh concerns about the nation's overall indebtedness and prompting some analysts to warn of threats to the value of the American dollar.

With goods continuing to flood into the United States from Asia and Europe, and indications that foreign governments still view the American market as the most attractive place to sell their products and invest their money, there was little indication in the latest report that the overall imbalance is likely to diminish soon.
Of course, the big problem is that capital flowing into the US is not for the most part being "invested", at least not in a manner that generates wealth in the United States. T-bills for tax cuts is not making us richer.
"I really believe we have a disaster scenario in the making," said C. Fred Bergsten, director of the Institute for International Economics, which has long been a center for those who worry about the nation's global economic stature. "As soon as the markets see these unsustainable levels of debt, the dollar could very well crack.''

But others said the threat was exaggerated by experts whose previous warnings have not been borne out. Claude E. Barfield, resident scholar and trade expert at the American Enterprise Institute, said that he was not one of the analysts "who think the sky is falling" because of the increasing deficit.

He said that the dollar had been weakening against the euro and some other currencies, which should have a positive effect on the trade balance by the end of the year. "I don't think there is any imminent problem,'' Mr. Barfield added, "but over time we are going to have to get our macroeconomic house in order.''
OK, anybody who would believe a paid hack -- I mean, "scholar" -- at the AEI over a real academic is an idiot. Unless Michael Ledeen is your idea of a responsible intellectual . . .

And the truth of the matter is, the USD has not been weakening in any substantial manner. The nominal major currencies index is down almost 25% since January 2002, but since January 2004 the USD is actually up. The nominal broad dollar index is down a mere 12% since February 2002, up from a whole 14% down in January 2004.

Secondly, it's going to take a massive fall in the dollar to even begin to stabilize the US current account deficit, and even if it does steady, the US foreign debt load will continue to grow remarkably. And in light of massive levels of intrafirm trade and transfer pricing, who's to say a USD fall will have any noticeable effect anyway?

Third, the dollar's 32-month decline has had no discernable impact on the current account deficit. Before the slide, in 2001:IV, the current account deficit stood at -3.50% of GDP. As the dollar fell, the deficit steady grew (contrary to Barfield's fatuous claims) to -5.15% of GDP in 2003:I. And the relatively steady dollar of 2004:I-II has accompanied a swelling of the CA deficit from -4.51% of GDP in 2003:IV to today's -5.71%.

But I already told you Barfield is a moron, didn't I?

Tuesday, September 14, 2004

The second quarter current account statistics are in, and man, what a doozy.
The U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--increased to $166.2 billion in the second quarter of 2004 (preliminary) from $147.2 billion (revised) in the first quarter. The increase was more than accounted for by an increase in the deficit on goods and a decrease in the surplus on income. The surplus on services increased, and net outflows for unilateral current transfers decreased.
For those of you keeping score at home, a month ago the General estimated that the 2004:II deficit would come in around -$161bn. Reality turned out to be even worse than my bearish deflationista self could imagine! And not only is this a huge increase in the deficit -- a 13% jump (or is that a fall?) in a single quarter. Combined with the lackluster GDP growth of 2004:II, the current account deficit for the second quarter stands at an incredible 5.7% of GDP!!

For any normal country, this would be the signal call for a free-fall of the currency. Clearly the dollar is living a charmed life -- but how long do you want to count on magic?

Back in the days of Reagan when the US current account deficit first began to swell, the worst it ever ran was 3.45% of GDP. The last time we were in that kind of territory was 1999. Even before this last quarter, the worst stood at 5.15% in 2003:I, nearly repeated in 2004:I (5.13%). 5.7% is a monster of a figure no matter how you slice it.

Since 2003:IV the current account is in a literal freefall. The deficit grew 31% in just six months.

The most ominous sign is the waning positive balance on income, which in the second quarter was at its lowest level in almost two years. More importantly, the net balance on income was down 78% from last quarter and down 68% from the quarterly average of 2003. It has been the net positive flow of income into the United States that has been one of the few saving graces of the growing current account deficit, offsetting the huge trade deficit with a small but net positive flow of income from US capital investments abroad.

With the United States' net investment position at around -30% of GDP, the balance on income was bound to turn negative sooner or later. In fact, its consistent ability to keep its head above water was a minor miracle for over 15 years, i.e. since the US became a "net debtor country". From 1960 to 1997 the US never ran a quarterly net income deficit. Not once. The second half of 1998 saw two consecutive quarter of net outward flow of investment income, but the trend was solidly reversed by ten consecutive quarters of positive net income. Since 2001, however, US net income flows have been on a wild ride, more than once reversing course by ten billion dollars in just 6 months.

While income receipts over the last three quarters have been fairly constant, income payments have skyrocketed. After nine straight quarters in the $60-71bn range, payments shot up to $84bn in 2004:II. And with all the debt the US is taking on from foreign lenders, how could they not?

It seems hard to reject the claim that the US is entering into a debt spiral. Ever larger trade deficits are amassed, paid for through more and more debt from foreigners (government and corporate bonds) and selling more and more property to them (stocks, real estate, fixed capital). The net income on that debt and property becomes negative (with a net investment position of -30% of GDP, how could it not?), thus income flows out. Thanks to the big trade deficits, the only way to bring that income back is to amass more debt and sell more property, which leads to more net outflows of income, which can only be brought back via more debt and more property sales, etc. etc.

What can end this spiral, bringing it to a close short of an Argentina-like catastrophe? [1] A dramatically falling dollar and/or [2] a dramatically rising US current account balance, say to around -2.5% of GDP (where the US was as recently as 1998). [2] without [1] just isn't a serious possibility; even with [1], [2] might be impossible short of a serious recession (which 'solved' the current account deficit in 1991). After all, this isn't going to be accomplished with a gargantuan growth in exports; imports will have to fall as well.

And when I say a "serious" recession, I mean it. In 1991 the US pulled out of a deficit of only around -1.5% of GDP. The recession of the early 1980s erased a deficit of just -0.5% of GDP, and the 1973-74 recession erased one just as small. Remember, we're at -5.7% of GDP now. Even to get to -2.5% we'll have to traverse over $300bn of territory, this when our trade balance is around minus $50bn a month.

Are you worried yet? I am.

Monday, September 13, 2004

Richard Berner at Morgan Stanley, the perennial "good cop" to Stephen Roach's "bad cop" (thanks to AngryBear commentor Mark S. for the metaphor), thinks the rise in inventories is much ado about nothing.
The recent pace of inventory accumulation is unsustainable, but in my view, stocks were too lean at the beginning of the year, and producers have scrambled to replenish them by expanding production slightly ahead of demand. Moreover, unlike in the late 1990s, prices are accelerating, giving producers an incentive at least to hold inventories, if not add to them. And, most important, final demand seems to be quickening again. Consequently, I think producers will continue to maintain growth in production at least in line with that of demand. And while our latest forecasts do not show any contribution to second-half growth from nonfarm inventory accumulation, there is now upside risk to that prognosis.
The General said a month ago that it was too soon to come to any conclusions about the big 2004:II rise in inventories. First, it was off of exceptionally low levels. Second, one quarter does not a trend make. Berner is saying little more. What is more worth noting is that Berner thinks two other factors are driving the US economy toward a rosy future.

First of all, according to Berner, "prices are accelerating". It's not clear in which universe Berner is living. Core inflation is up to a whopping 1.8% annual rate, but the three month percent change in July was down to 0.4% from 0.8% in May. Core commodities inflation -- the kind of things you can actually store up in a warehouse -- is still experiencing deflation (-1.1% annually). There was a little burst of actual inflation in the first half of 2004, but July saw a return to outright deflation in core commodity prices.

Prices of durable goods have fallen every month since March and the three-month rate has been negative for three months running after a brief burst of actual inflation in February through April. For nondurables there is actual inflation, but the three-month figure is down to 1.7% in July from 2.2% in May. More importantly, nondurables minus food and beverages saw absolute price declines in July. With food prices at the producer level falling dramatically, it's only a matter of time before retail prices begin declining again as well.

This is a long way of saying both that Berner is ignoring all the evidence of price deflation and that any price "acceleration" we've seen is already past.

But the most important thing to Berner is the "quickening" of final demand. The evidence for this is supposedly
upward revisions to merchandise and services exports and construction outlays boosting second-quarter final demand. Partly as a result, we expect that second-quarter GDP growth will be revised up by as much as 0.6 percentage points to 3.4%. Moreover, consumer spending and exports � two key areas of weakness in June � rebounded sharply in July.
Well, 2004:II GDP was initially 3.0%, then revised down to 2.8%. That would be a hell of a revision for Berner to be right. Sure total exports in July were higher than June, but June was such a total bust that Berner's working with a low bar. July exports were still lower than May's levels, whereas July's imports were far higher than May's. Consumption was up in July, but rooted in unsustainable processes. As the General said two weeks ago,
personal saving as a percentage of disposable personal income was a barely visible 0.6%. In real terms it was the lowest monthly total and the lowest savings rate since December 2002 and the third lowest under the Bush administration.
This is hardly cause for celebration -- or for a sanguine view of US inventory levels.

Stephen Roach points out today that US capital knows it is foolishness to lay out big investments in this economy.
On the surface, there can be no mistaking the recent accelerated pace of business fixed investment; average annualized growth of 11% over the past five quarters stands in sharp contrast with a 6% annualized contraction over the first six quarters of this recovery. But these are �gross� investment figures, representing the sum of outlays on new capacity as well as those earmarked to replace worn out or obsolete capacity. It turns out that it�s the latter portion of capital spending budgets that is driving the overall trend. According to US Department of Commerce statistics, in 2003, net investment by US businesses -- the portion of capital spending that goes to the expansion of productive capacity -- remained about 60% below levels prevailing in 2000. Like the hiring decision, Corporate America remains exceedingly cautious in expanding the scale of its domestic production base.
Monopoly capital -- just about the only kind now in America -- is especially cautious about overaccumulation, having apparently learned the lesson of the late 1990s. The globalization of production is helping to locate what capital investment is occurring abroad rather than in the US proper. Roach thinks that data on falling real wages, limited capital investment and dramatically rising productivity suggests
an unusually intense strain of slash-and-burn cost-cutting -- tactics that could lead to increasingly �hollow� companies that will be unable to maintain market share in a growing global economy.
That's true only if the companies are American and not global, which increasing they are not. The companies won't be hollow so much as the US economy will be.

O brave New Economy, that has such people in it!