Tuesday, November 30, 2004

Prepare your goods for immediate price descent.
Wal-Mart Stores Inc., the world's largest discount retailer, on Tuesday signaled it will cut prices in the weeks before Christmas after a strategy against deep discounts backfired on the first weekend of the holiday shopping season. . . .

"While our prices were generally as low as they have ever been, our competition was even more aggressive. We have learned from this and will move quickly to respond to what our customer has told us during the rest of the holiday season," she said.
Good Lord, when a $15 DVD player isn't low enough, is Wal-Mart just going to start giving the stuff away?

Don't you give up on deflation, now, you hear?

With the revised third quarter GDP numbers now in, as well as the trade data for all three months of the third quarter, let's play everyone's favorite guessing game.

Yes, it's Estimate That Current Account Deficit!

In 2004:III the goods and services balance stands at -$155.7bn. We don't have the figures on unilateral current transfers, but for the last six quarters these came in anywhere between -$16.4bn and -$20.7bn, with the overall trend upwards. Let's be conservative and pick -$18bn. Finally, the balance on income which is the hardest to guess. It fell to a mere +$2.6bn in the second quarter, and with all the news of rising foreign holdings of US debt as well as rising US interest rates relative to those in Europe and Japan, let's do the easy thing and say perfect balance on income for the third quarter. That puts our guesstimate for the current account balance for 2004:III at -$173.7bn, 4.5% larger than in 2004:II.

With 2004:III GDP at a seasonally-adjusted annualized $11,810.0bn in current dollars, we get a current account balance as a percentage of GDP figure of [drum roll, please] . . .

-5.88%!
Recall that the CA balance in 2004:II was -5.70% of GDP. I can't help but see the dollar absolutely tank when the third quarter data on the current account is released on December 16. Either that or it provokes a massive intervention by the Bank of Japan -- and perhaps the European Central Bank in tow.

Mark your calendars!

ADDENDUM: John Quiggin has a nice discussion today of CA deficits in Australia specifically, and the Anglosphere in general. This is hardly a strictly American phenomenon.

The preliminary revisions to third quarter US GDP are released today, and it appears that Americans went even more hog wild on consumption than previously thought.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.9 percent in the third quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent. . . .

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in PCE [personal consumption expenditures] and a deceleration in imports that were partly offset by a downturn in private inventory investment and a deceleration in residential fixed investment.
Or, cutting through the mild manner of the Department of Commerce, Reuters puts it all in proper focus.
Consumers ratcheted up their spending at a 5.1 percent annual rate, more than three times the 1.6 percent rate posted in the second quarter and the strongest since a 7 percent surge in the fourth quarter of 2001. Consumer spending accounts for more than two-thirds of the $11-trillion U.S. economy.
Let's pause to take in some of the massive spending that went on in 2004:III. Over the second quarter, nondurable goods consumption rose 4.8% and durable goods consumption rose a mighty 17.2%. Those seemingly never-ending car incentives certainly did the trick.

Revisions did tick the third quarter savings rate up to 0.5%, however, putting the savings rate for the year so far at 0.96%. Anything under 1% for the fourth quarter will ensure us our lowest rate since 1933. And Reuters calls this "healthy and sustainable growth"??

As consumption screamed ahead, investment in the built environment -- both in residential and non-residential structures -- slacked off markedly. The nonresidential structures investment numbers have bounced around greatly in a one-on one-off pattern; 2004:III was off, with investment changed -0.3%. More importantly, residential structural investment fell to its lowest level since 2001:IV, up just 1.7% in the quarter.

Defense spending continues to soar. After taking a one quarter breather, spending on tanks, bombs, military pay and the rest rose 9.8%. Since 2003:I, the quarter before the Iraq War began, defense spending is up 15% in real terms. Did somebody say "military Keynesianism"?

In comparison, during the early years of the Vietnam War, real defense spending rose 24% in real terms over the first six quarters of growth (1965:II to 1966:IV). Dubya is not quite up to LBJ's standards, but give this Texan another four years and he'll be there. Vietnam War spending peaked in 1968:I after eleven quarters of growth, but its most robust growth phase was over in seven quarters. That means George W. will be making up ground quite nicely in 2005.

Monday, November 29, 2004

In light of the increasingly palbable concern over the Iranian nuclear program, it might be of considerable benefit to look back on the growing menace of the Chinese nuclear program in the early 1960s and extant US plans to "strangle it in its crib".
The bases for direct action against Chinese Communist nuclear facilities were explored in April 1964 in a paper by Robert Johnson of the Department of State Policy Planning Council, which paper it was apparently decided should form the basis for any subsequent consideration of the subject. . . .

The major conclusion of the paper is to the following effect:
"It is evident . . . that the significance of a [Chicom nuclear] capability is not such as to justify the undertaking of actions which would involve great political costs or high military risks."
This conclusion appears to be based on the observations summarized above regarding technical feasibility, impermanence of effect, and political difficulty, and, very importantly, on arguments to the effect that the near and medium term consequences in Asia of a Chinese nuclear capability will be small, and that direct threat to the US will be very small.
The government document from which these quotes are taken, written by Arms Control and Disarmament Agency official George Rathjens, feels the Johnson paper (which is still classified) is all wet. Yet history has indeed vindicated Robert Johnson, and evaluations of pre-emptive strikes on foreign nuclear facilities forty years ago should be used to help observers think seriously about the present day.

Riffs on the holiday shopping season thus far are already suggesting that while the rich are continuting to live the high life, the American working class may finally be tapped out.
U.S. retail credit-card transactions rose more than 6 percent in the first weekend of the holiday shopping season. November sales at Wal-Mart Stores Inc. gained about 0.7 percent, less than forecast, sending the shares lower. . . .

Retail sales rose 11 percent on Friday, the day after Thanksgiving, from a year earlier according to ShopperTrak, which estimates revenue based on customer traffic at about 30,000 stores. Optimism was tempered by results at Wal- Mart, the world's largest retailer, which predicted the month's same-store sales would rise from 2 percent to 4 percent.

"We're going to have a good holiday season but I do think we're going to have the tale of two consumers," said Deloitte & Touche USA Vice Chairman Tara Weiner in an interview in New York. "High oil and gas prices, health-care costs are weighing heavy on the lower-income consumer's budget."

According to the British mortgage broker Nationwide, a 10% price decline in one year constitutes a "housing crash". And the likelihood of a crash in 2005 is rising dramatically.
Nationwide, the UK's largest building society, will warn this week that there is a 20 to 30 per cent chance of a house price crash happening next year.

The forecast for 2005, published on Tuesday, will add to the growing fears of a "hard landing" for the housing market.

The society's chief economist, Alex Bannister, said he still believed that "slight increases" in prices were the most likely scenario next year, giving this a probability of 60 per cent.

But the chance of prices falling by, on average, between 10 and 20 per cent in 2005 was now almost one in three, he said. The chance of prices growing more strongly, in line with recent rises, was one in 10.

"The market is highly valued at the moment," he said. "Our view is that people won't panic. But anyone telling you that [a crash] is not going to happen is talking rubbish."
According to HBOS, seasonally-adjusted prices across the UK changed -0.5% in August and -1.1% in October. Another firm, Rightmove, is reporting -1.7% so far in November.

And already 2004 is showing a much steeper slide than in 1989 when the previous UK housing bubble began deflating. When seasonally-adjusted prices peaked in May 1989, they were -0.7% two months later; if Rightmove's data proves correct, nationwide prices peaked most recently in September 2004 and will be -2.8% from peak in November.

Moreover, one has to suspect that the price decline in London is more severe than in the country as a whole. Prices nationally were +2.7% in 2004:III whereas in Greater London they were -0.6%. Median home prices might not fall 10% across the country, but in London the chances could be 50-50.

Some in Britain are already looking ahead to dramatic falls in interest rates from the Bank of England to counter-act the popping bubble.
The housing downturn has changed perceptions about the interest-rate outlook.

One of the most aggressive interest-rate forecasts is from John O�Sullivan at Dresdner Kleinwort Wasserstein. He expects the Bank of England to cut the base rate to 4% by the end of next year in an efforts to limit the house-price drop to 5%.

My view is that the Bank�s monetary policy committee, having worked hard to get rates up from last year�s emergency low level of 3.5% to the present 4.75%, won�t surrender cuts without a fight and would like to keep rates where they are for quite a long time. But these things can change rapidly.

The shift in rate expectations, particularly among City economists, has been dramatic, and it is reflected in the currency markets. The pound has been climbing against the dollar but slipping against the euro. Its rise against the sickly dollar would have been much bigger had it not coincided with the softening of the outlook for rates.
The BoE loaded its basis point gun over the last eighteen months by 1.25% and is now at 4.75%, giving it a lot of room to move lower. The US Fed is up 100 basis points, but only to 2.0%. Time to get a few more interest rate increases under the belt before the bubbles start popping a bit closer to home?

Private foreign capital is losing interest in US treasuries. Rumors are that the Indonesians, the Russians and maybe even the Chinese are starting to bail, too. So it only makes sense that George W. is planning a massive borrowing campaign.
The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, members of Congress and independent analysts.

The White House says it has made no decisions about how to pay for establishing the accounts, and among Republicans on Capitol Hill there are divergent opinions about how much borrowing would be prudent at a time when the government is running large budget deficits. Many Democrats say that the costs associated with setting up personal accounts just make Social Security's financial problems worse, and that the United States can scarcely afford to add to its rapidly growing national debt.

But proponents of Mr. Bush's effort to make investment accounts the centerpiece of an overhaul of the retirement system said there were no realistic alternatives to some increases in borrowing, a requirement the White House is beginning to acknowledge.
Bush's solution to the "problem" of massive borrowing for Social Security privatization has to be a continuation of super-loose monetary policy. The Fed can keep interest rates low, the Treasury can issue massive amounts of debt, and when nobody wants to buy Treasury notes, the Fed can gobble them up as it did in 2002 when it absorbed 31% of the debt growth that year.

Unlike the 1970s, we won't get cost-push inflation in tow; there just aren't the wages to force it any longer. Instead we'll have more investment bubbles and more wealth affect consumption.

Greenspan was able to ride the bubbles for the last five years, so I suspect Bush figures Greenspan and his successor can ride them out another four.

Friday, November 26, 2004

The latest iteration of the dollar's tumble has unusually vented pressure upon the USD towards the pound. From the Friday, November 19 close to 1:15pm EST today, the yen is +0.2% against the dollar; the euro is +1.8%; and the pound is +1.9%.

General Glut is going to be in the UK for four months next year along with Mrs. Glut and all the little PFCs. I'm sure glad I got most of my dollars into pounds a few weeks ago.

Ah, the fine art of reading the tea leaves.
Statistics on the US Treasury Department�s website show mainland Chinese holdings of treasury securities totalled US$174.7bn at the end of September, up from US$172.3bn at the end of August.

Meanwhile China�s foreign exchange reserves rose from US$496.2bn to US$514.5bn, suggesting a fall in the proportion of reserves held in treasury bonds.

The recent slide in the dollar has provoked widespread discussion in China about the possible losses being suffered because of the country�s enormous foreign exchange reserves. Beijing does not give any breakdown of its reserve holdings.

�I think the Chinese monetary authorities are very clever and they must already have taken action,� Prof Yu said. �But I have no information whatsoever about what they are doing.�
Because the US is so dependent on foreign purchases of dollar-denominated assets, there is no need for a move as dramatic as an end to buying for the dollar to be sent into a tailspin. Simply buying less will do the job just as well.

The fact that nobody knows what the People's Bank of China is doing says volumes. The conclusion seems to follow that we have no idea when China will break its current dollar peg. This information suggests to me that a basket peg (although surely heavily weighted with dollars) is much more likely than a simple upwards revaluation of the renminbi.

The big shift could come completely out of the blue. But would it?

Thursday, November 25, 2004

Japan's ability for infinite intervention in support of the dollar seems set to continue.
Japan's consumer prices fell slightly in October from the same month a year earlier, underscoring widespread expectations that no immediate shift in the Bank of Japan's super-loose monetary policy was in sight.

Core nationwide consumer price index, which excludes the prices of volatile fresh food, was down 0.1 percent in October from the same month a year earlier, compared with a fall of 0.2 percent expected by economists.

The core index was unchanged from September on a seasonally adjusted basis, the data from the Ministry of Internal Affairs and Communications showed on Friday.

"As a trend, deflationary pressures are easing, but it won't be until 2006 that deflation will come to an end," said Yoshimasa Maruyama, senior economist at Mizuho Research Institute.

Movements in consumer prices are closely watched as the BOJ has vowed to maintain its current ultra-easy monetary policy until year-on-year changes in core nationwide CPI stablises above zero.
The real question is not Japan's ability, but its will.
"It's certainly possible over the next couple of days that they do something," said Craig Ferguson, currency strategist in Melbourne at Australia and New England Banking Group Ltd. "We think they'll intervene above 100 yen, they can't afford to let it go through there."
Since it's Turkey Day in America, here are the numbers on our favorite turkey. Today the dollar fell all the way to �102.38 and to $1.3284 to the euro. Venting on the euro (and sterling) seems to be private capital's strategy du jour in light of justifiable fears that the Bank of Japan will crush yen speculation against the dollar.

How long can the Europeans sit on the sidelines? An even better question: how long before the European Central Bank, the Bank of Japan and the People's Bank of China realize that a coordinated dollar policy is in their best interests?

UPDATE: In Friday morning trading the dollar fell at least as low as �102.28, and the euro rose to at least as high as $1.3289. Interestingly, the pound is soaring most of all, up over 0.2% on the day against the dollar. Something's always cookin'!

Wednesday, November 24, 2004

As we all know, private foreign capital is losing interest in dollar-denominated assets.

Treasury notes
2004:I . . . $69.5bn
2004:II . . . $45.1bn
2004:III . . . $23.5bn

Agency bonds
2004:I . . . $42.2bn
2004:II . . . $66.2bn
2004:III . . . $35.1bn

Corporate bonds
2004:I . . . $62.3bn
2004:II . . . $61.2bn
2004:III . . . $95.6bn*

Equities
2004:I . . . $2.3bn
2004:II . . . -$8.1bn
2004:III . . . $3.8bn

Total
2004:I . . . $176.3bn
2004:II . . . $164.4bn
2004:III . . . $158.0bn*

(* - there is some doubt whether the record $43.3bn in coporate bonds purchased in September 2004 by private foreign capital was not at least in part a veiled purchase by foreign central banks through private institutional buyers)
Perhaps it's because everyone seems to be speculating on marked Asian currency revaluation for 2005 (from yesterday's WSJ):
Asia appears to be in the early stages of a regionwide currency revaluation, partly in anticipation that China will let its own currency float higher sometime in the next year.

From Tokyo to Seoul to Singapore, some investors are buying up large volumes of Asian currencies, a strategy that assumes Asian countries will tolerate somewhat stronger currencies in the year ahead. The South Korean won is trading near its highest level against the dollar in seven years, while the Japanese yen is up nearly 7% since the beginning of October.

Investors also are pouring capital into Asia's equity and bond markets -- a bet that appreciating currencies will boost the value of their assets over time.

The mortgage rate squeeze really appears to be on now for the US housing market.

According to Freddie Mac, the rate on 30-year fixed-rate mortgages fell to 5.72% the week ending November 24. That's the second weekly decline in a row and a full 62 basis points below the recent high of 6.34% in mid-May. The long money continues to be cheap.

At the same time, rates on 1-year adjustable rate mortgages are climbing rapidly. They now stand at 4.27%, marking the fourth weekly rise in a row and up 91 basis points from the recent low of 3.36% in late March.

That means the spread between the 30-year FRM and the 1-year ARM is compressing as it has been since June. Now the spread is down to just 1.45%, the lowest since November 2001.

Since all the bubbly California housing markets have gone over completely to ARMs, one would think that this compression of the FRM/ARM spread would signal the beginning of the end of the froth. One would think . . .

The concrete shoes the dollar has been wearing since mid-October are getting mighty heavy today. Hopefully it's not time yet to go sleep with the fishes.
The under-fire dollar slumped to yet another all-time low against the euro in European morning trade on Wednesday as renewed oil price strength and Tuesday�s comments from the Russian central bank continued to weigh on the greenback.

Alexei Ulyukayev, first deputy chairman of the Russian central bank, hinted that Moscow would step up its ongoing policy of shifting more of its $113.1bn of foreign exchange reserves from dollars into euros. This in turn raised the spectre of Asian central banks with higher reserves still following suit.

�A move to say 40 per cent euro from possibly around 30 per cent is a notable amount and highlights the support the euro may be deriving at present when you consider other central banks may also be diversifying out of the dollar,� said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi.

Neil Mellor, currency strategist at Bank of New York, raised the prospect of a potential domino effect: �Talk of central banks readjusting their reserves to encompass a greater euro weighting has been rife in the foreign exchange markets for quite some time, along with speculation that OPEC members may shift to euro-denominated oil sales.

�A dam can only take so much pressure. Russia�s stated intent to review its reserve weightings, in favour of the euro once again, could well lead to similar announcements by its counterparts across the world.�
This was always the real threat to a steady dollar decline -- that one or more major players would signal to the rest of the herd that it is time to stampede. Last Thursday I noted how, since the dollar began sliding in January 2002, the Russians have socked away $76.7bn in reserves. This makes Russia a major player indeed, although on the second tier down from China and Japan. If Russia is committed to continue swelling its reserves, then simply slowing down on their purchases of USD-denominated assets could be enough to embolden the speculators. If Russia is stabilizing its reserves, then a shift down to 60% of its holdings in dollar means it will actually be selling US T-bills, and then who knows what could break loose.

It's not only Russia that is making noise. South Korea has been selling its won for two days now, almost surely buying dollars with it. As of the end of October, the Bank of Korea had $178.4bn in reserves, by my count #4 on the global central bank reserves leader board behind Japan, China and Taiwan.

As I type, the USD is back under �103 (�102.59 to be exact) and the euro has pushed above $1.31. I've argued before that I don't think we'll see intervention by the Bank of Japan until around �100, and even then it may not be like anything we saw earlier this year. From January to March 2004 Japan spent around �15 trillion propping the dollar up above �105. Today, however,
Kaoru Yosano, policy chief of Japan�s ruling Liberal Democrat party, appeared to pour cold water on this scenario, saying: "The effects of currency intervention would only be short-lived and limited."
With the Chinese firmly committed to absolutely no near-term action on its dollar peg, it is hard to believe the Japanese will simply stand by and watch. However, this comment from Yosano may mean that the BOJ is committed only to slowing the dollar's slide rather than drawing a line in the sand which the USD shall not cross. If so, that's a dangerous game to play. Slowly pulling your finger out of the dike can invite disaster; all-out deterrence is a far better strategy.

The final piece to this puzzle is the European Central Bank. Are the export-dependent Germans willing to see the euro leap to $1.40? As Brad Setser argued a few weeks back, the Europeans may -- sooner rather than later -- get pulled (against their will) into supporting the dollar. Folks in the know think that won't happen before $1.35=�1. The ECB could even wait until $1.40=�1, but if the USD is hell-bent to sleep with the fishes, look for joint European-Japanese action to arrive just in time to save it from itself.

Tuesday, November 23, 2004

Stephen Breyer -- by way of E. J. Dionne -- hits the nail on the head.
Conservative politicians, including President Bush, say that they oppose judges who "legislate from the bench" and that they hope to fill the judiciary with "strict constructionists." That sounds good, because we want democratically elected politicians, not judges, making the crucial decisions. Yet, at this moment in our history, it is conservative judges who want to restrict the people's right to govern themselves.

That may sound sweeping, but the current trend among conservatives is to read the Constitution as sharply limiting the ability of Congress and the states to make laws protecting the environment, guaranteeing the rights of the disabled and regulating commerce in the public interest.

This new conservatism is actually a very old conservatism. It marks a return to the time before the mid-1930s when judges struck down all sorts of decent laws -- for example, regulating the number of hours people had to work without overtime pay -- reasoning that such statutes violated contract and property rights. Such rulings denied legislators the ability to resolve social problems and make our society more just. The pre-New Deal judiciary that many conservatives are now trying to restore was the truly "imperial judiciary."

The new conservative judicial activism is a greater threat to our democracy than the prospect of some future court striking down the Roe v. Wade decision on abortion. If Roe is lost (and I doubt it will be), states will still be free to pass liberal abortion laws. But if extreme conservative judges limit the authority of Congress and state legislatures to pass environmental, civil rights, labor and consumer laws, our democracy will be less robust, less effective and less just.

It appears the forecasted demise of the US trade surplus in agriculture is indeed coming to fruition.
Slumping prices and aggressive competition mean the US will import as much food in 2005 as it sells overseas, government figures say.

The Department of Agriculture report suggests exports will fall about 10% to about $56bn (�30bn), while imports grow 3.3% to reach the same level.

The US has been a net exporter of foodstuffs for almost half a century.

Canada is the only country thought likely to buy more US goods, with China showing the biggest fall in sales.

Cotton and soybeans are likely to be the biggest victims of a $1.5bn reduction in Chinese demand, the report's authors said.

Soybean sales the world over were predicted to fall almost 15%, as competition from Brazil and other countries hots up, while Russia - once a lucrative customer - is now a rival in the wheat trade.
What exactly again is the US going to sell in exchange for all the imported cars and consumer goods? Oh, that's right, our homes (via Fannie Mae, Freddie Mac and Ginnie Mae agency bonds) and our government debt. We simply can't reel in either the housing bubble or the budget deficit. Our Wal-Mart economy demands it!

So far, US policy toward Beijing is "Whatever China wants, China gets". One wonders if the Bush administration will be taking this bit of advice to heart?
In a mark of China's growing economic confidence, the country's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment.

In an interview with the Financial Times, Li Ruogu, the deputy governor of the People's Bank of China, warned the US not to blame other countries for its economic difficulties. . . .

�The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only three per cent that of US labour. They should give up textiles, shoe-making and even agriculture probably.

�They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.�
We not only hear this talk from the People's Bank of China; we hear it from American economists as well. Can the US simply concentrate on aerospace and scientific instruments and specialized industrial machinery, give up on consumer goods and agriculture, and move toward more balanced trade?

That is the dream of both China and the liberal economist -- and it is a pipe dream.

If one organizes goods by principal SITC code, one finds that so far in 2004 the US is running a trade surplus in
[1] a handful of high-technology (and a few not so high-tech) manufactured goods: airplane parts, airplanes, chemicals-cosmetics, chemicals-dyeing, chemicals-fertilizers, chemicals - n.e.s., chemicals-plastics, printed materials, pulp and waste paper, scientific instruments, spacecraft, specialized industrial machinery;

[2] agriculture: animal feeds, cigarettes, corn, cotton, hides and skins, rice, soybeans, tobacco, wheat; and

[3] minerals: coal, crude fertilizers/minerals, gold (nonmonetary), metal ores (scrap), mineral fuels (other).
The balance on each category of goods in which the US has a comparative advantage is:
High-tech goods: +$40.4bn
Agriculture: +$20.6bn
Minerals: +$1.1bn
For a little context, consider that the US balance on clothing this year is -$50.7bn; on footwear, -$12.3bn. In 2004 the United States is spending its entire comparative advantage on clothes and shoes. And that assumes the US contines to be a major exporter of raw agricultural goods. If the US gives this sector up as the Chinese and the liberal economists urge, then the country can't even afford it's imported clothing.

Perhaps you think this analysis is a bit unfair? Let's take in the entirety of US trade for 2004. Here are the balances by principal end-use category:
Foods, feeds and beverages: -$5.3bn
Industrial supplies: -$148.2bn
Capital goods: -$6.4bn
Automotive vehicles, etc.: -$103.2bn
Consumer goods: -$197.0bn
Other goods: -$9.4bn
Services: +$37.1bn
In short, the US has a small services surplus and is in near-balance on foods, feeds and beverages; capital goods; and other goods. Yet the country is wildly out of balance on industrial supplies; automotive vehicles; and most of all, consumer goods. Clearly, if the US is going to even begin approaching balance (nobody think the US will actually achieve balance, nor must it do so), the balance on vehicles, industrial supplies and especially consumer goods is going to have to change. Don't give me a bunch of pie in the sky about how the US is going to boost exports of specialized industrial machinery 60% (to pay for footwear) or nearly double exports of plastics (to pay for furniture) or double exports of airplanes and airplane parts (to pay for TVs) or more than triple exports of scientific instruments (to pay for clothing) -- because that's what it is going to take to address just the most egregious imbalances.

If the US is giving up completely on manufacturing consumer goods, then it is next to impossible for the US trade deficit to approach balance. If the US doesn't dramatically ramp up the manufacture of industrial supplies -- e.g. computers, pharmaceuticals, industrial machinery -- and automobiles, then it will indeed be impossible.

"Easily balance"?? There will never be enough world-wide demand for airplanes, satellites and travel services to pay for all the clothes, shoes, TVs and furniture Americans import. Believe it.

UPDATE: Apparently the US won't be exporting a surplus of airplanes after all. Li in fact knows as much since Chinese airlines are increasingly buying Airbus planes anyway! "Easily balance" . . .

Monday, November 22, 2004

Here are a couple of housing foreclosure tidbits for you all to nibble on.

Dallas-Fort Worth, which has seen existing home prices slide 1.6% from last year:
There were nearly 10,000 foreclosure postings on Tarrant County [Forth Worth's county] homes in 2004, the highest number of postings since the real estate crash of the late 1980s, according to figures from Foreclosure Listing Service.

The 9,944 Tarrant County foreclosure postings this year were 14 percent more than in 2003, according to the service.

Dallas, Collin and Denton counties each had increases of 7 percent and 14 percent over last year.

The four counties together reached 31,409 foreclosure postings, a 12 percent increase over 2003.
Across Colorado, too; prices in Denver seem to be declining:
even without every foreclosure being counted, 9,930 foreclosures were opened through October, 28.4 percent more than the 7,731 in the first 10 months of 2003.

"That's scary, really scary," Dubas said.

In all of 2003, 9,431 foreclosures were filed in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson counties. That was a 43.5 percent increase from 2002, when 6,574 homes went into foreclosure.

Last year's foreclosures were surpassed only by the 17,122 foreclosures filed in 1988. Foreclosures last year accounted for about 1 percent of the homes on the market, compared with 2.3 percent of the housing stock in 1988.

Declining savings, falling real wages and zombies in my post over at The American Street today.

Would that which we call a "housing crash" by any other word smell as foul?
UK house prices are "coming off their peaks" and may fall by 20% in the next three years, Barclays Bank has said.

The UK's fifth biggest lender believes consumer spending will be hit as a result but does not predict a "crash".

The prediction comes as property website Rightmove says prices will fall until the market reaches a level at which buyers feel confident again.

It found asking prices fell by 1.7% in the month to mid-November, with annual inflation falling from 13.4% to 11.6%.

Barclays, which owns former building society the Woolwich, is forecasting an 8% fall in property prices in 2005, followed by further declines in 2006 and 2007.
As far as I can tell, there is nowhere a widely accepted working definition of "housing crash". There are, of course, two components: speed and distance. Is a steep but relatively shallow fall more a "crash" than a more gradual yet deeper descent? The other way around? Barclay's forecast of falling prices for three-and-a-half years says "crash" to me even if it's not a bolt out of the blue.

But rather than speculate, let's look at past housing market busts widely discussed as "crashes" and compare them to the present situation in the UK. It is widely agreed that the year 1992 was the Year of the House Price Crash in Britain. According to the Halifax House Price Index, prices in Greater London changed -9.4% that year. This was in the midst of a multi-year descent:
1989 . . . +2.3%
1990 . . . -5.8%
1991 . . . -5.8%
1992 . . . -9.4%
1993 . . . -4.9%
1994 . . . +1.8%
From 1989 to 1993 home prices in London changed -31% and it took nine years for nominal prices to recover to their 1989 level.

Seasonally-adjusted prices in Greater London changed -0.6% in 2004:III, and all the data shows another decline in the fourth quarter. This will be the first back-to-back quarterly fall in London housing prices since 1995. The last time there were three in a row was at the tail end of the early 90s crash.

With the second half of 2004 already in the books with falling prices, and combined with Barclay's forcasting an 8% slide in 2005 plus another two years of declines after that, it's hard to see this as anything other than the beginning of a London "housing crash". But if you prefer "housing bust" I can go along with that, too.

Saturday, November 20, 2004

While we're on the subject of the American saver (the term is laughable on its face!), ponder a bit of data form an article on credit card debt from today's New York Times.
the credit card business . . . is now the most lucrative segment of banking. [Revolvers, or those who roll balances over from month to month, never paying in full] make up the profitable majority [59%] of the 144 million Americans who have general-purpose credit cards. . . .

. . . regulators and lawmakers have been reluctant to crack down on a popular consumer product that fuels America's economic engine. Consumer spending pulled the country through the last economic downturn, powered largely by purchases financed with debt, to the tune of $2 trillion.

. . . The typical household has eight cards with $7,500 on them. . . .
Of course, since we know that 41% (59 million) of American credit card holders carry no revolving debt, that means the 59% who do (85 million) are carrying a lot more than $7500 per household.

Credit card companies are raising their interest rates through the roof, some well into the 20s%. Sixty percent of American consumers are going to start hitting brick walls soon; those 4.1% one-year adjustable-rate mortgages should come in mighty handy. Maybe Greenspan can convince the 40% of Americans without revolving credit card debt to start racking up the bills, too?

Friday, November 19, 2004

Stephen Roach is right -- the world needs a weaker dollar. That being said, our favorite Cassandra is putting the horse before the cart as well as expecting far too much from a weaker currency.

First the whole horse and cart thing.
America�s saving shortfall has major consequences for the rest of the world. Lacking in domestic saving, the US imports saving from abroad in order to fund the ongoing growth of its economy. And it must run massive current-account and trade deficits to attract such capital from overseas. The United States balance-of-payments deficit hit an annualized $665 billion in mid-2004, or a record 5.7% of GDP.
The US doesn't need to run massive current account deficits to attract capital. China, for example, is being flooded with foreign capital as it runs a moderate current account surplus around 2% of GDP. The current account deficit follows the capital inflows, not the other way around.

Now it could be said that the US federal government must run massive budget deficits to attract capital from overseas. If foreign capital loses interest in US stocks and bonds, capital (either private or official) can still be attracted by selling treasuries. This, of course, is the great irony of the budget deficit debate to the degree that we're even having one in the US. If the federal government cuts its deficit in half in four years, how will we attract the capital necessary to run such massive trade deficits? For the 12 months through September 2004, 42% of all capital inflows to the country are into treasury notes. If we won't sell them our debt any longer, they might not bring their money at all.

Thus we wind up raising taxes, cutting government spending and consuming fewer imports (and thus fewer goods overall) all at the same time. Nice pickle we've gotten ourselves into.

Second, how much different will a lower dollar really make? The general line goes, of course, that a lower dollar makes US imports more expensive and US exports less expensive, thus automatically adjusting the current account imbalance toward a long-term sustainable level. In respone, I offer this insight from Obstfeld's and Rogoff's recent paper "The Unsustainable US Current Account Position Revisited".
our framework should not be thought of as asking the question: "How much depreciation of the dollar is needed to rebalance the current account?" Thought wildly popular, this view is misguided. In fact, most empirical and theoretical models (including ours) suggest that even very large autonomous exchange rate movements will not go far toward closing a current account gap of the magnitude presently observed in the case of the United States. The lion's share of the adjustment has to come from saving and productivity shocks that help equilibrate global net saving levels, and that imply dollar change largely as a by-product . . . the relative price of imports and exports is only one element underlying the overall real exchange rate response, and not the dominant element from a quantitative viewpoint.
In short, simply selling more and buying less isn't going to cut the mustard. The US is going to have to start saving a hell of a lot more to get out from under this weight.

How high will interest rates have to go before Americans save rather than spend? Former Fed Governor McTeer is making noise indicating that a federal funds rate of 2.5% or so is high enough. The yield on the 10-year is stubbornly low and 30-year mortgage rates just won't go above 6% while one-year ARMs are, according to the Mortgage Bankers Association, back under 4%. Clearly dramatically higher interest rates are called for if the US current account is going to start shrinking, but all the signs from the markets are that ultra-low rates are here to stay.

US savings may have fallen to 0.0% in October, and there is always yet another lower-rate mortgage to take out to facilitate continuing consumption without income. Until US interest rates start rising, I don't think the falling dollar is going to do much of anything to address the current account deficit.

Alan Greenspan gets religion.
The question now confronting us is how large a current account deficit in the United States can be financed before resistance to acquiring new claims against U.S. residents leads to adjustment.

. . . A continued financing even of today's current account deficits as a percentage of GDP doubtless will, at some future point, increase shares of dollar claims in investor portfolios to levels that imply an unacceptable amount of concentration risk.

This situation suggests that international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing of the U.S. current account deficit and rendering it increasingly less tenable. If a net importing country finds financing for its net deficit too expensive, that country will, of necessity, import less.
There are still a few holdouts and dead-enders who think that the USD is actually undervalued, but the vast majority of observers agree that for the US current account to begin moving towards balance (nobody is actually predicting or even recommending actual balance), the dollar will have to fall. And fall it will. What no one knows is how far and how fast.

The FT reports today (sub. only) that currency speculators worldwide are having a field day shorting the dollar since there is so little downside risk.
This is one of the rare times that the currency markets and most academic economists speak with one voice. The pressure on the dollar is downward. While most hope that any falls occur gradually, giving the world time to adjust, no one should be surprised if, at some point, the currency realignment becomes rapid and destabilising. . . .

The black market money-changers that hover by the kerb outside one Beijing bank have grown so established in recent years that they now give out name cards. . . .

The dynamics of the Beijing kerbside market are mirrored worldwide. Speculators in Singapore's renminbi futures market and investment bankers in London, Hong Kong and New York are betting on an imminent appreciation of China's currency against the US dollar.
Up until this point, the US always could count on the Bank of Japan and the People's Bank of China to prop up the dollar when it trended downwards too far and too fast. Clearly the speculators know this and are wary about when to pull the trigger and try a run on the dollar.

Japan and China seem to be engaging in a very delicate dance. China supports to dollar to fight inflation, promote investment and cultivate its Wal-Mart fueled export market in the US. Japan supports the dollar as much to keep its exports competitive in the US as in China. The upshot is that Japan need not intervene dramatically to support the dollar if China relaxes its peg (either recalibrating, widening the variation bands, moving to a basket, or some combination). After all, if the dollar can fall as the renminbi rises, then Japan is not as concerned about the dollar falling.

Much seems to depend on what China and Japan can together agree upon. They can together move away from the dollar or together stay with the dollar, but they cannot move in separate directions. What this suggests, of course, is that the dollar is much more likely to [1] stabilize or [2] crash than it is to [3] conduct a steady orderly decline.

The dollar is hovering today around �103. In comments at AngryBear, Brad Setser notes that
the BOJ stopped intervening in the spring, and subsequently has been buying longer-term treasuries out of the bank accounts/ cash holdings it built up in the spring. at some point, it will need to start buying $ again (intervening) to keep on buying treasuries
Adjusted for US inflation and Japanese deflation, the �105 of late 2003 is now the �100 of late 2004, so we might not see much action until then -- unless the Chinese have something up their sleeve that will make us all start scrambling.

Dollar falls below �103 this morning.

News at 11.

Thursday, November 18, 2004

This makes it five in a row now for the Conference Board's Index of leading economic indicators.
The US economy is "losing steam," the Conference Board said, reporting that the index of US leading economic indicators fell 0.3 percent in October, marking the fifth straight decline.

The string of decreases "is a clear signal that the economy is losing steam and may start off 2005 with a relatively weak pace of economic activity," said Ken Goldstein, economist for the board.
The last time we saw this many declining months in a row was . . . oh, wait a minute, since the Conference Board took over responsibility for computing and disseminating these Composite Indices in 1995, the leading indicator has never seen a five-month decline.

This is all meaningless noise, of course. The Very Smart Economists are telling us
"It's not yet a signal that we've got real trouble in the economy," said Gary Thayer, chief economist with A.G. Edwards & Sons Inc. in St. Louis. "It's signaling more moderate growth in the months ahead, but not necessarily a recession."

Gary Bigg, associate economist at Bank of America in New York, said: "We don't view it as particularly worrisome. More recent data is signaling that the economy is starting to pick up steam and strengthening."
So is the Conference Board's leading index just a bunch of hot air?

The leading index claims to forecast economic conditions 3-6 months into the future. From a high in April 2000 to bottoming out in March 2001, the index changed around -1.6% (they revised all their numbers in December 2000 so it's hard to exactly compute the change). And lo and behold, the US entered unofficial recession in 2000:III and experienced declining GDP also in 2001:I and 2001:III.

As of October the index is already -1.2% from its high in May. Clearly something unpleasant is on its way.

A few gems from US Treasury Secretary John Snow:
"Why do I support a strong dollar policy?" he responded. "The answer is because it is our policy."

. . .

He dismissed suggestions that Asian central banks may reduce their holdings of Treasury securities.

"Our debt markets are the deepest, broadest and most liquid anywhere," he said. "We are readily able to market U.S. Treasuries."
The November sale of $51bn in debt seemed heavily reliant on foreign central banks, but the Treasury's own data shows waning official interest in federal debt. The two weakest months of the year for net foreign central bank purchases of US treasuries occurred in July and September. Moreover, private foreign capital has purchased just net $4.8bn in the last two months after averaging $38.1bn every two months from January through July.

One hopes John Snow isn't doing a Baghdad Bob impression.

The United States Senate has been working hard.

S. 2986

AN ACT

To amend title 31 of the United States Code to increase the public debt limit.


Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. INCREASE IN PUBLIC DEBT LIMIT.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking `$7,384,000,000,000' and inserting `$8,184,000,000,000'.

Passed the Senate November 17, 2004.
Of note, the bill to raise the federal government's debt ceiling passed 52-44 on a near strict party-line vote. Departing Democrats [sic] John Breaux and Zell "Mad Dog" Miller voted with the Republicans while John Ensign of Nevada was struck either with a bout of fiscal conservatism or perhaps reckless insanity in light of the Bush administration's demands for unswerving loyalty. Earlier this week Ensign was awarded the The National Tax-Limitation Committee's "Tax Fighter Award", so I guess there is at least one Republican who thinks that cutting taxes should be matched by spending cuts as well.

We all know that Japan and China are the Big Players in propping up the dollar. We might not appreciate the role of other smaller but still important players which also "dirty float" against the USD like Taiwan or Korea -- or Russia.

According to the Central Bank of the Russian Federation, between December 31, 2000 and November 12 of this year the country's foreign exchange reserves more than quadrupled, from $28.0bn to $113.1bn, making Russia the largest player in the (in)formal dollar bloc outside Asia. Since the dollar began sliding in January 2002, the Russians have socked away $76.7bn in reserves.

Thus news that Russia is starting to abandon the dollar is really something to watch.
Speculation that Russia was altering its foreign exchange regime to give greater weight to the euro helped drive the single currency higher early in the session.

Russia's central bank later told Reuters the euro will play a greater role than the dollar in its foreign exchange targeting as trade volumes with Europe had increased.

"If there's a suggestion that they need to buy euros, it is bad news for the dollar," said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation.

The central bank also said the proportion of its foreign exchange reserves held in euros has risen to 30 percent from 10 percent two years ago, backing up recent market speculation that the central bank has been buying euros.

Wednesday, November 17, 2004

A few facts for you to ponder while you roast your chestnuts by that radiator powered by heating oil this evening.

US distillate -- the stuff from which home heating oil is made -- production is up to 3.85 million bpd on its four-week average ending November 5. US distillate imports are at 0.30 million bpd, down a bit from late October averages but up from September and early October levels. The four-week average of domestic production plus imports for the week ending November 5 thus totaled 4.15 million bdp.

US distillate demand for the week of 11/5 (four-week average) was 4.22 million bdp. A year ago at this time is was just 3.80 million bdp -- more than 11% higher y-o-y.

Thus it's no surprise that, despite impressively ramped up production, distillate stocks continue to fall.



It's getting particularly worrisome in the Northeast, the region most dependent on heating oil. Stocks in the Central Atlantic states rose slightly the week of 11/5 for the first time in months, yet they continue to fall in New England. And this is during a late fall which has been quite average to, if anything, slightly above average in temperature. What happens when that first blast of arctic air comes hurtling down out of Canada?

We're back, back in the refi groove.

According to the Mortgage Bankers Association, refinancing activity as a portion of total mortgage activity ramped up last week to 48.6%. This is the highest level for refi activity since mid-April. Total mortgage activity is only slightly below (-3.8%) that mid-April mark.

In the bubbliest of US housing markets, use of ARMs has gone through the roof. Last week Freddie Mac told us that rates on one-year ARMs shot up to 4.16%, 20 basis points higher than two weeks prior, so time is of the essence. Yet clearly nobody is all that concerned with rising interest rates. If interest rates are going to stay low for the forseeable future (and the market clearly believes that they will), why not replace the 5.3% 30-year fixed-rate mortgage you hauled in last summer with a shiny new 4.2% 1-year adjustable-rate mortgage?

Sure you're betting that rates next November will be lower than 5.3%, but you're an American so you're both [1] optimistic and [2] in a betting mood. Plus you don't save any money, so you need to suck more equity out of your house to keep up with the Jones' (who are doing the same thing).

Way back in February 2004, Alan Greenspan curiously urged Americans to dump the fixed-rate mortgages they had just jumped on not more than a year earlier and switch into ARMs. He was trying to squeeze one more round of refinancing-cum-consumption out of the US economy, and we seem to be following straight down that path still today.

P.S. Apologies to anyone who, by my opening line, was compelled to endure flashbacks to Ace Frehley's truly terrible 1979 self-titled album.

After a week to catch it's breath, the dollar continued its long downward slide today.
The dollar hit another all-time low against the euro and slipped further against the yen on fears little will be done to stem the greenback�s decline.

US Treasury Secretary John Snow reiterated his government�s position this morning in London: �our policy is for a strong dollar ... a strong dollar is in both the national and international interest.�� But the talk is increasingly perceived as hollow. . . .

Central bankers and finance ministers from the world�s twenty largest economies meet in Berlin on Saturday, but the foreign exchange market is worried the G20 will fail to act to stem the dollar�s decline.

Mr Towner felt though that the more the dollar is pushed beyond $1.30 the greater the likelihood of �very strong rhetoric� from the G20, or even intervention.
It's clear now that John Snow must say "our policy is for a strong dollar" because the first time he fails to do so, the dollar will clearly begin to plummet dramatically. Everyone knows Snow is lying, but the game must be played. If Snow stops playing, then all bets come off the table and we leap into the unknown.

As I type the dollar is worth just �104.15. Clearly because of continuing Japanese deflation and US GDP inflation running at 2.2%, �105 to the USD isn't as strong a yen as it was back in March when the Bank of Japan was interevening like mad to keep the dollar above that line. Still, with the Japanese economy flagging once again, one expects the BOJ will pull the trigger by �100 to the dollar at least.

The real wildcard is the European Central Bank. German exports are slipping and eurozone growth was nearly stagnant in the third quarter. Will the ECB join the BOJ in a joint intervention?

UPDATE: At 1:30pm EST the dollar is under �104.

Tuesday, November 16, 2004

As goes London, so goes California?
UK house prices in the 3-months to October fell by their fastest rate since December 1992 as the Bank of England's series of interest rate hikes and speculation of a housing market crash took their toll, a key survey showed.

The latest house price survey from the Royal Institution of Chartered Surveyors revealed that in the three months to October, 41 pct more surveyors reported a fall in house prices than a rise, 12 pct more than in September and the highest number reporting a drop since December 1992.

RICS attributed the dismal state of affairs to a lack of new buyers, with the number of sales falling by 25 pct from the same period a year ago to hit its lowest level in 9 years.
Recall that yesterday I pointed out how the first-time and marginal buyer -- which I defined as those potential homeowners putting down less than 20% and thus forced into mortgage insurance -- has been for all practical purposes eliminated from California housing markets. While the national figure is 25%, they are down to just 13% of the market in Los Angeles/Long Beach/Riverside, 13% in Sacramento, 8% in the Bay Area and 5% in San Diego.

Recall also that housing prices actually fell in the third quarter in Orange County (-1.8%) and the Bay Area (-0.2%).

The IMF told us some months ago that there is a global house price boom and housing markets from Australia to the UK to Spain to the US are all linked together.

Look out below.

The latest Treasury International Capital System report is out today. What did foreign capital and foreign central banks think of US investment opportunities in September? Let's check in and see . . .

Foreign capital absolutely loved US corporate bonds, gobbling up $44.6bn worth of them. This was the largest monthly purchase on record. It's probably not just coincidence that interest rates on corporate bonds fell almost 20 basis points in September (thanks to high supply?).

Both foreign capital and central banks returned to buy US treasuries. Foreign private capital bought $9.9bn in treasuries after dumping them in August. Central banks bought $10.1bn. While the $19.2bn overall was a marked turnaround from August, August and September still come in as the lowest two months of the year. Souring on t-bills seems to be the overall theme.

US government agency bonds -- mostly Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities -- took an unexpected tumble. Central banks bought just $2.0bn worth, and foreign private capital actually sold them to the tune of $1.3bn. The overall total for September came out to just $956m in net agency bond purchases, the lowest since September 2003 and the second-lowest since October 1998.

Finally, foreign capital thought US stocks sucked in September, selling net $3.8bn. This marked the second month in a row and the fifth of the last seven months to show foreign capital fleeing the US stock market.

Overall net capital flows into the US ticked up slightly, from $59.9bn in August to $63.4bn in September. A big shift in private capital's appetite for US corporate bonds kept the dollar propped up without any need for support from the Bank of Japan and the People's Bank of China.

Oh, pay no attention to that debt behind the curtain. The housing market is surging, after all!

Shares of Fannie Mae fell sharply in pre-market trading Tuesday as the mortgage giant's outside auditor KPMG refused to sign off on its third-quarter earnings report, causing the the company to miss a regulatory deadline for filing it. . . .

Fannie Mae, whose accounting is under investigation by the Securities and Exchange Commission, also said Monday that if the agency finds that it has improperly accounted for derivatives � the financial instruments it uses to hedge against interest-rate swings � it would show an estimated net loss of $9 billion for the July-September period. And it acknowledged that some of its accounting policies do not comply with generally accepted accounting principles.

Washington-based Fannie Mae, which finances one of every five home loans in the United States, disclosed the SEC investigation on Sept. 22, stunning investors.
While lots of folks, including General Glut, have been focused on the appetite of foreign capital and foreign central banks for US federal government debt, we've often overlooked their appetite for what are called "US agency bonds". Who in the federal government issues debt besides the Treasury? Fannie Mae, Freddie Mac and Ginnie Mae, that's who.

Foreign capital loves our mortgage-backed securities. You can read a little primer, but in short US mortgages get purchased by the millions by Fannie Mae and the others, bundled up into security form, and then sold off to private investors. From January through August of this year, foreign capitalists net purchased nearly $145bn in agency bonds. That's even more than foreign capital spent on US T-bills over the same period (net $128bn). As the US housing markets boom, so booms the mortgage-backed securities market.

In September, however, foreign capital fled Fannie Mae and her sisters. After five straight months of purchasing a monthly average of $20.5bn, foreign capital net sold $1.3bn in agency bonds. This was the first time since September 2003 that foreign capital divested from US agency bonds and only the second time since 1998.

Crisis at Fannie Mae, a la the savings and loan fiasco of the 1990s, will surely drive foreign capital far away from US mortgage-backed securities. And if foreign capital won't buy them, then up go mortgage rates and down goes the housing market.

So many possibilities to make a housing bubble go "pop".

Well, well, it seems that the October inflation figures at the producer level took everybody by surprise.
U.S. producer prices shot up 1.7 percent last month, the biggest gain in nearly 15 years and well above expectations, as energy costs skyrocketed and food prices surged, a government report showed on Tuesday.

Even outside of food and energy, producer prices climbed a relatively swift 0.3 percent in October, the Labor Department said, well ahead of the 0.1 percent gain Wall Street had expected.

The increase in the overall Producer Price Index, a gauge of prices received by farms, factories and refineries, was the largest since January 1990 and easily outstripped expectations for a 0.5 percent gain.
Big gains in energy prices were predictable and predicted, but a 6.8% rise in just one month was obviously more than folks bargained for. By comparison, the huge oil price spike in July 2004 (when NYMEX prices jumped over $7/barrel) translated into just a 2.4% rise in the PPI.

A big leap in producer food prices was a bolt out of the blue. The 1.6% rise was the largest since October 2003 and followed four straight months of falling or stagnant prices. Interestingly, the jump in producer food prices was strictly at the finished goods stage. Crude food prices changed -0.8% in October, and intermediate food prices -1.9%. According to the Commodity Research Bureau, raw foodstuffs prices were -2.1% in October, and since April -11.7%. So all that money producers are paying for food is not for the actual food part. Finished food goods inflation is most likely simply another manifestation of high energy prices.

Core PPI on finished goods was up 0.3%, the second month in a row at that level. Seasonally adjusted, core producer price inflation is only running at 1.7%, however, and over the last three months the annualized rate is but 2.1%. With oil prices falling precipitously over the past three weeks, these big numbers are surely a one-off phenomenon.

We get the consumer price data tomorrow, and economists are surely scrambling now to revise their predictions upwards. What amazes the General is that the consumer seems not to have missed a step in the face of these price hikes. We'll know more on Wednesday, of course, but these numbers suggest that as long as Americans have a dollar in their pocket, they will spend it. Prices don't matter.

What happens, however, when John and Jane Public don't have a dollar to spend? That day may soon be upon us. Remember that in September 2004 the personal savings rate dropped to 0.2%. Over the first nine months of the year the personal savings rate is running at a mere 0.9% -- as I've said before, the lowest savings rate since the depths of the Great Depression. Strong demand continues, but only thanks to the complete elimination of saving from American consumer habits.

When there is no more money to spend, then what? Yes, you know the answer already. Borrow!

Monday, November 15, 2004

My latest musings on the California housing bubble(s) -- "Double, double, toil and trouble" -- are up now at The American Street. Some interesting data on use of ARMs, price-to-income ratios, first-time buyers -- and Herb Stein.

Stephen Roach is amazingly sanguine today on the future of a measured and managed dollar decline, orchestrated first and foremost by Japanese and Chinese central bankers who have seen the light and won't fight the "fundamentals" any more.
Asia now has to give and accept its role in accommodating the dollar's adjustment. I have made two treks to Asia in the past six weeks, and my sense is that Asian officials are now increasingly resigned to this responsibility. Japan and China are, of course, the linchpins to pan-Asian currency adjustments. While the latest Japanese GDP statistics were surprisingly soft, officials in Japan are nearly unanimous in believing that the Japanese economy is now strong enough to withstand the pressures of yen appreciation. In China, the near-term verdict is more guarded, but I get the sense in Beijing that the move to a more flexible foreign-exchange mechanism � either widening the bands on the existing dollar peg and/or shifting to a peg against a basket of currencies � is now likely to come sooner rather than later. I also got the impression from my travels elsewhere in Asia that diversification of foreign-exchange reserves is becoming an increasingly important objective of regional policy makers. Add to that current-account and dollar-related concerns expresses by senior Federal Reserve officials from the United States, and there is good reason to believe that the world has basically come together in attempting to manage the dollar lower.
Of course, this feels a bit too much like a Tom Friedman column ("I went to A and talked to X in his living room and he told me . . . then I had coffee with Y in a popular spot frequented by terrorists and he agreed with me . . . and then Z, a well-respected expert, confirmed everything I believe about the world . . ."), but I haven't been schmoozing with the transnational illuminati of late, so we'll have to take Roach at his word -- and with a pinch of salt.

Brad Setser weighs in today on the ability of the Bank of Japan to fight off the dollar speculators ad infinitum.

You should read the whole thing, but here's the teaser lines:
The notion that the hedge funds can overwhelm markets may need to be revised after Japan's Ministry of Finance (MOF) redefined the possible by selling some insane amount yen debt to fund an intervention war chest -- a war chest that has financed $100 billion of intervention earlier this year and is far from being empty.

The MOF, and the Chinese central bank, are effectively becoming the biggest macro hedge funds of them all.
In January 2003 Japan (both private individuals and the BOJ) owned $385bn in long-term US Treasuries; by August 2004 that total stood at $722bn (Setser estimates around $500bn of that is in the BOJ's coffers). Japan has not intervened to support the dollar at all since March, it's money supply is growing slowly, it does no sterlization and it is still in deflation. All this suggests to me that Japan can prop up the USD to its heart's delight if it so desires.

Of course, a week ago Brad DeLong claimed
If the private market--which knows that with high probability the dollar is going down someday--decides that that someday has come and that the dollar is going down NOW, then all the Asian central banks in the world cannot stop it.
Unfortunately, our friendly neighborhood economist never tells us why this is so.

I've been arguing for about a month now that as long as Japan is in deflation, its ability to defend the dollar is unassailable. In my view, Japan's will to defend it -- which is tied up in the trials and tribulations of the country's export dependence -- is more relevant. Since the election, the markets have been very wary of pushing the dollar below �105. Fear of awakening the giant?

DeLong should read more of Setser and General Glut. Unfortunately, he never answers my emails.

When US Treasury Secretary John Snow says this ad naseum,
Our policy on the dollar is well known. We support a strong dollar. A strong dollar is in America's interests
what in the world should lead us to believe him when he says this?
[China's] public statements embrace the idea of moving to [renminbi] flexibility. They've taken a lot of steps to get their economy into a position where they can do so. We praise them for that and we urge them to move as fast as they can.
In fact, I have far more confidence in Catwoman winning Best Picture than in China breaking the dollar peg. I wonder what John Snow thinks of Catwoman? Maybe he knows something I don't.

A week and a half ago, the conservative blogosphere was pissing all over Kofi Annan for his warnings against a full-fledged assault on Fallujah. A good example was this penetrating insight from Little Green Footballs:
At what point does it become clear to all that the UN and Kofi Annan are objectively working on the side of the mujahideen in Iraq?
While the right is crowing over the near-victory of US forces in Fallujah, they seem to be boldly embodying the equally insightful aphorism "penny wise and pound foolish".
The fighting started in Mosul two days after U.S. tanks entered Fallujah. . . .

U.S. tanks and attack helicopters on Sunday swooped into Baiji, the midway point between Mosul and Baghdad, where insurgents destroyed a key highway bridge and claimed the city. Masked men carried guns aloft in a protest Sunday in Baqubah, a chronic trouble spot for U.S. forces just northeast of the capital. U.S. forces also engaged fighters in Tall Afar, a largely Turkmen city west of Mosul, and in Hawija, northwest of Baghdad.

Bands of armed men moved freely at night in several neighborhoods of Baghdad, where the number of attacks on U.S. forces has more than doubled from a week ago. Ramadi, 30 miles west of Fallujah, remains a rebel stronghold.

And U.S. and Iraqi forces continue to fight in Samarra, the city advertised as a model for the assault on Fallujah when 1st Infantry Division tanks rolled in there six weeks ago to reclaim the city from insurgents. Under the curfew again in effect there, Samarra residents are allowed on the street for only four hours each morning, and over the weekend its latest police chief, installed just last month, quit.

"We never believed a fight in Fallujah would mean an end to the insurgency," a U.S. Embassy official in Baghdad said. "We've never defined success that way.

"We still have the very difficult problem of a Sunni insurgency."
It seems hardly reasonable to believe that the entire Sunni resistance will be put down militarily within two months. And yet with the Sunni Triangle in outright rebellion, how can the January elections occur? If they go on without meaningful Sunni participation, how can Iraq avoid civil war after Sistani and the Shi'ites take control?

Maybe Allawi is talking as well as fighting, but I haven't seen any news reports to suggest so.

Saturday, November 13, 2004

I haven't blogged on the California housing bubble in a couple of weeks. My last post was comparing the California bubble to that in London which now seems to be deflating. Considering the National Association of Realtors is releasing its metropolitan area housing data for the third quarter on Monday, I thought I'd give you all a little preview.
Anthony Downs, a senior fellow at the Brookings Institution in Washington, D.C., who has been researching issues at the California Public Policy Institute since July, recently wrote that state prices are running 10 times ahead of household incomes, compared with a national ratio of 4-to-1.

"To me, this imbalance foreshadows a sharp, near-term slowdown in California housing-price escalation," Downs said.

As if to underscore that point, the California Association of Realtors yesterday reported San Diego's September affordability index at 11 percent, up slightly from the record low of 10 percent for the previous two months.

The number means that only 11 percent of local households earn the $132,800 necessary to buy the median-priced home with a 20 percent down payment and a 30-year, fixed-rate loan at 5.7 percent. However, nearly three-quarters of current buyers are picking adjustable-rate loans at lower rates and making far less than a 20 percent down payment.
In Los Angeles:
Only 17 percent of households could afford Los Angeles County's $459,660 median-priced home in September, according to the California Association of Realtors' Housing Affordability Index, which was released Thursday. While it was a 7-percentage-point dip from a year ago, the index for the county held steady at a 14-year low for the fourth consecutive month.
In the Bay Area:
Of the country's 50 biggest cities, homeowners in San Jose stand the greatest chance of seeing their homes plunge in value, according to PMI Mortgage Insurance Co., of Walnut Creek, a subsidiary of The PMI Group, Inc.

But there's some good news attached to the "risk index" ranking of 509 -- it's down slightly from the summer quarter.

The national average for the fall is 186, which implies a 18.6 percent probability of an overall house price decline, measured within the next two years and across the 50 largest housing markets. That's up from an index of 171 in August. . . .

San Jose, Oakland, and San Francisco are three of the top five MSAs at the top of the risk index list.
Statewide:
The percentage of households in California able to afford a median-priced home stood at 19 percent in September, a 5 percentage-point decrease compared with the same period a year ago when the Index was at 24 percent, according to a report released today by the California Association of REALTORS(R) (C.A.R.). The September Housing Affordability Index (HAI) increased 1 percentage-point compared to August, when it stood at 18 percent.
More analysis on Monday.

Friday, November 12, 2004

Slower, slower, much slower everywhere.

First we heard that GDP growth in the third quarter in the UK was an annualized 1.6%, this following five consecutive quarters in which annualized growth exceeded 2.8%.

Then we heard that German annualized GDP growth in 2004:III was a pathetic 0.4%. The country's annual growth rate over the last four quarters stands at a mere 1.3%, and according to the German statistics office,

"The decisive factor in the weak economic growth in the third quarter was - in contrast to the four preceding quarters - declining exports."
Then we hear that France, the economic powerhouse of the eurozone (yes, it's true, don't laugh) racked up the same pathetic growth as Germany in the third quarter, a bleak annualized 0.4%. Economists are blaming low consumer spending, which goes a long way in explaining why US exports to France in July and August were the lowest two months of the year.

Finally, news comes in that Japan is also struck with the same malaise that is squeezing Europe.

Japan�s economy in the three months to September grew a meagre 0.1 per cent in real terms quarter-on-quarter, underscoring concern that the country�s most promising post-bubble recovery may be running out of steam.

In nominal terms, discounting unadjusted for the effect of deflation, the economy barely budged, growing at just 0.01 per cent, according to government figures released on Friday.
Well, at least we can be cheered by the persistence of Japanese deflation driven in part by falling Japanese wages which reduces US exports and inflates the current account deficit even more to be financed by Bank of Japan purchases of US debt to further delay tax increases, buoy our consumption and keep this dysfunctional cycle in continual motion.

Recall that two-thirds of the relatively large drop in the US trade deficit in September was due to falling imports, just one-third due to rising exports. US export growth is flagging dramatically since last year,

Real annualized export growth (SA)

2003:IV . . . 4.10%
2004:I . . . 1.78%
2004:II . . . 1.77%
2004:III . . . 1.26%

and with these growth figures from the largest advanced capitalist countries, promises to fall even further.

Robert Reich is a gigantic moron.
In their heart of hearts, presidents don't like it when their own party controls both houses of Congress. It's the same whether the new President is a Republican or a Democrat. Why? Because when your own party runs Congress, you've got to help them pay off all the IOUs they've accumulated along the campaign trail from all their constituents and patrons and sponsors. You don't have the excuse that you can't help with the payoffs because the other party runs one or both houses of Congress. No, it's entirely your party. You�re stuck with the bill for it. . . .

Why could Clinton hold down spending and special-interest tax loopholes when Bush couldn't? Because for most of the Clinton years, Republicans and Democrats in Congress couldn't agree on much of anything. That meant Clinton could veto or threaten to veto even bills containing pet projects of leading Democrats by blaming Republicans for larding up the bills with too many favors.

Over the last four years, Bush has signed every spending bill that came his way -- every morsel of pork for the folks back home in every Republican congressional district, every bit of corporate welfare for the big businesses that contributed to every Republican senator and every Republican representative. Total federal tax revenue is $100 billion lower this year than when Bush took office in 2001 but spending is $400 billion higher!

Poor President Bush.
Considering Reich is (or pretends to be) an economist, one might think he would be astute enough to recognize that the bond market as much as the Republican Party restrained spending in the Clinton years. Remember Carville's remark about wanting to be reincarnated as the bond market? Moreover, under Clinton the Democrats became the Party of the Balanced Budget. Who ever said Clinton wanted to spend money on anything??

Bush has neither political restraint in an opposition party with power, nor economic restraint in a bond market pushing up interest rates, nor an ideological restraint in a faith in the rightness of balanced budgets.

Yeah, poor, poor George.

Thursday, November 11, 2004

A colleague of mine and I were talking about former CIA director George Tenet in late summer when Tenet resigned, and we were amazed at the willingness of the guy to fall on his sword and take the entire WMD fiasco upon his own shoulders. For him to do such a thing, we figured this guy has to be taken care of. After all, Tenet is a civil servant, not a right-wing ideologue or a corporate muckity-muck going back to a bizillion dollar position. He even spoke publicly of his interest in making more money in the private sector in order to finance his kid's college education.

So how was Tenet going to be paid off? That was the question -- for if he wasn't paid off, he'd be prime recruitment material for all the disaffected spooks and former spooks in the CIA who have been railroaded by Bush and his lackeys.

Well, the answer is revealed today.
George J. Tenet has kept a low public profile since he stepped down as the country's intelligence chief in July. But it turns out that he has had a lot to say.

In the past few months, Mr. Tenet has earned well over $500,000 in speaking fees from about 20 appearances, associates said. He is negotiating for a lucrative book contract. But when he speaks to large groups, he does so only under ground rules intended to keep his remarks off the record. . . .

He collects fees of about $35,000 an appearance. . . .

It is not unusual for government officials to earn large amounts of money for books and speeches after leaving office. Other former intelligence chiefs, including Robert M. Gates and R. James Woolsey, have gone on speaking tours, and Mr. Gates wrote a memoir, but for fees generally understood to be considerably less than those being paid to Mr. Tenet.
I guarantee you, $35,000 a speech is a lot better money than anything Mr. Tenet is going to be making at Georgetown next year.

The big $51bn debt sale this week by the US Treasury is now over. $22bn in 3-year notes was sold on Monday, $15bn in 5-year notes on Tuesday, and $14bn in 10-year notes yesterday. How did things turn out? Did private capital markets gobble up these attractive little beauties, or did Uncle Sam have to go begging once again to the land of the rising sun?

Demand looked pretty robust for Monday's and Tuesday's sales.
The Treasury auctioned $22 billion in three-year notes yesterday and $15 billion of five-year notes today. Demand at both auctions increased, based on the amount of bids received versus the amount of debt sold.

The five-year notes were sold at a 3.51 percent yield, and investors bid for 2.90 times the amount of available securities, compared with 2.32 in October. So-called indirect bidders, a group that includes foreign central banks, bought 44.8 percent of the notes, up from 39.2 percent in the previous auctions.

``It was a good auction,'' said Paul Calvetti, head of U.S. Treasury trading at Barclays Capital Inc. in New York. The firm is also a primary dealer, which are obligated to bid at the auctions. ``It seems foreign central banks are still buying Treasuries.''
This follows the Monday sale in which investors bid for 2.24 times the amount of available securities, compared with 2.02 in August, and indirect bidders bought 53.6% of the debt, up from 36.5%.

This enthusiasm didn't carry over into Wednesday's sale, however. From AFX News Limited (thank you LexisNexis!),
Wednesday also brought the week's final Treasury auction, which involved the sale of $14 billion in 10-year notes at a 4.28 percent yield. The bidding was for 2.05 times the available notes, off from 2.12 at the prior sale in September. Indirect bidders, namely foreign central banks, bought 33.9 percent of the securities.
So, let's sum up. Of the $51bn in debt floated this week, indirect bidders (mostly foreign central banks) bought $23.3bn, or 46%. That's a pretty big presence no matter how you slice it.

Wednesday, November 10, 2004

One more comment on today's trade figures. As many in the press have noted, the biggest component of the "improvement" in the US trade deficit for September was the dramatic $2.3bn turnaround in trade with the eurozone (+$756m in exports, -$1.5bn in imports). Who got hit the hardest?

US goods imports from Germany changed -$544m (down two consecutive months); Italy, -$296m (down three consecutive months); Spain, -$108m . . . and how about poor little Ireland, -$814m!

In Berlin, Rome, Madrid and Dublin, $1.30 per �1 has to be sounding downright ugly.

Oh, and Pope Alan and his College of Cardinals raised interest rates today.

As Reuters put it today,
The U.S. trade deficit narrowed sharply in September, aided by a slide in the value of the dollar, which helped push exports to record levels, a government report showed on Wednesday.
The evidence that a weaker dollar is the main cause is rather suspect in that throughout September the USD was still in its long Summer 2004 stable period. But that's not why I'm writing.

I'm writing about US "exports [at] record levels"! What US goods and services exactly are being gobbled up by the rest of the world at "record levels"? Here's a list of the US export sectors experiencing the biggest growth in 2004 over their 2003 levels.
Travel services . . . $9.7bn
Other private services . . . $6.9bn
Other transportation services . . . $4.6bn
Industrial machines, other . . . $4.1bn
Pharmaceutical preparations . . . $3.3bn
Telecommunications equipment . . . $3.2bn
Chemicals, organic . . . $3.1bn
Semiconductors . . . $2.7bn
Measuring, testing, control instruments . . . $2.5bn
Plastic materials . . . $2.5bn
Electric apparatus . . . $2.4bn
Passenger fares . . . $2.4bn
Computer accessories . . . $2.2bn
Engines, civilian aircraft . . . $1.9bn
Royalties and license fees . . . $1.9bn
Medicinal equipment . . . $1.6bn
Petroleum products, other . . . $1.6bn
Services transfers under US military sales contracts . . . $1.6bn
Metalworking machine tools . . . $1.4bn
Gem diamonds . . . $1.3bn
Wheat . . . $1.3bn
Industrial engines . . . $1.3bn
Corn . . . $1.2bn
Cotton, raw . . . $1.0bn
Discuss.

The yen is bouncing like a rubber ball off the playground blacktop as private capital realizes it hasn't the stomach to play chicken with the Bank of Japan.
The yen fell by the most against the dollar in six months on concern Japan will sell its currency to protect exports and economic growth.

Demand for the yen waned as it approached 105.50 per dollar, a level traders including Scott Schultz at Brown Brothers Harriman & Co. said might be near the Bank of Japan's threshold for currency sales.

``We've seen some jawboning recently from Japanese officials,'' who have said they won't allow the currency to strengthen more than justified by prospects for economic growth, Schultz said. ``People are a little skittish of taking dollar-yen below 105.50.''

Japan's currency weakened to 107.24 yen at 10:22 a.m. in New York from 105.67 yesterday, according to electronic foreign- exchange dealing system EBS.
Of course, this isn't all due to jawboning. There are indications that central banks are big consumers of the $51bn in debt the US Treasury is issuing this week. And where there's smoke -- central banks buying dollars -- there is always a hell of a lot of Japanese fire.