Monday, May 30, 2005

After four months of triumph, tears, toil and travel, General Glut and his little platoon head back across the pond to the land of E pluribus unum. We've enjoyed London and Britain in general, but it will be nice to sleep in our own beds, till our own little plot of God's earth, and enjoy small town America again.

I'll leave you with this patriotic parable until I blog again -- probably Thursday.
He was born on the fourth day of July
So his parents called him Independence Day
He married a girl named Justice who gave birth to a son called Nation
Then she walked away
Independence he would daydream and he'd pretend
That some day him and Justice and Nation would get together again
But Justice held up in a shotgun shack
And she wouldn't let nobody in
So a Nation cried

Oh, oh
When a Nation cries
His tears fall down like missiles from the skies
Justice look into Independence's eyes
Can you make everything alright
Can you keep your Nation warm tonight

Well Nation grew up and got himself a big reputation
Couldn't keep the boy at home no, no
He just kept running 'round and 'round and 'round and 'round
Indpendence and Justice well they felt so ashamed
When the Nation fell down they argued who was to blame
Nation if you'll come home we'll have this family again
Oh, Nation, don't cry

Oh, oh
When a Nation cries
His tears fall down like missiles from the skies
Justice look into Independence's eyes
Can you make everything alright
Can you keep your Nation warm tonight

Sunday, May 29, 2005

Consider this your Memorial Day/May Bank Holiday post, one day early.

There are many bits of evidence one can muster to identify housing bubbles. The Sunday New York Times trotted out a lot of data on purchase-to-rental price ratios to further bolster the argument that in California, Florida and parts of the Northeast, it's bubblemania.

The logic of the indicator is, of course, that if purchase and rental prices both increase at roughly the same pace, there are some actual economic fundamentals driving the inflation: population growth, job growth, income growth, whatever. Of course, the ratio can increase somewhat if the quality of the purchased housing stock rises more than the quality of the rental housing stock, but there shouldn't be a complete disconnect between the two.

Read the entire article to get a flavor for the data, but check out this chart for something to chew on. What stands out most remarkably to me is that in 2000:I, before the US asset-based economy switched from stocks to housing, the purchase price to rental price ratio across all major US housing markets (data for 54 of them are reported) was virtually the same. The national average stood at 11.6, with San Jose at the high end (14.1) and Pittsburgh at the low end (10.5). Note that this gap was not wide: San Jose was 122% of the national average and Pittsburgh was 91%.

It's quite a different story five years later. In 2005:I, the ratio for the national average is up to 17.1, with the top and bottom at an amazing distance from one another. The peak is now San Francisco at a stunning 34.1 (San Jose is a close second at 34.0); the trough is Albuquerque at 11.8 -- still above the national average from five years ago, I might add. Thus the high is now 199% of average; the low, just 69%.

Not only is the gap tremendously larger with the peaks in the stratosphere. The opposite motions of purchased versus rental home properties in a few markets has to be a harbinger of danger. Over the past five years, rental prices have actually decreased in frothy San Jose, San Francisco and Oakland, and have barely budged in New York, all while purchase prices have vaulted skyward. No wonder the affordability index of homes in the Western US has plummeted over the last year.

Current purchase-price-to-median-family-income ratios show just how wild the markets are in the most bubbly California regions:
San Diego: 9.3
San Francisco Bay area: ~8.0
Los Angeles: 8.0
And nobody relies on adjustable rate mortgages like folks in the Golden State. Even now, 50-70% (depending on the market) of all California homes are purchased with ARMs. In the Northeast it's only around one-third.

In California, the state's real estate industry may have begun sheeding jobs. The non-seasonally adjusted peak was August 2004 when 200,500 Californians worked in the sector. At last count (April 2005) that figure stood at 199,500. Y-o-y the industry is still 1.6% larger, but that is thanks to the last big burst of job growth in California real estate in the first half of 2004. The sector has been stagnant to slowly shrinking since last summer, and no wonder with the number of houses for sale actually falling.

In 2004, 8.60% of all non-farm jobs in California were in either real estate or construction, up from 7.45% in 2000. Compare that to the national figures of 6.37% and 6.15% respectively. Not only is bubblicious California more reliant on the real estate sector than is the country as a whole, but it has become much more so over the last four years than has the country as a whole. Thus any popping bubble in California won't simply cut into general consumption; it will take jobs in its wake.

The writing is on the wall. Time to study up on the 1990 California real estate crash.

UPDATE: Brad DeLong kindly links to this post and one of his commentators directed me to an old but similar story at CNN/Money which has some more juicy data. In particular, this story offers comparisons for the monthly cost of owning vs. renting in several markets. In places like Atlanta and Dallas it is actually cheaper to own than to rent. But in the frothy West it can be 51% (Los Angeles) to 69% (Bay Area) more expensive to own. With all those interest-only loans and ARMs in the West, these figures can only grow larger.

Friday, May 27, 2005

According to the Associated Press, the US economy is coming up roses thanks to the bright sunshine of rising personal income.
Personal income rose in April at the fastest pace this year while people's spending slowed after a big jump in March, the government reported Friday.

The Commerce Department reported that incomes rose by 0.7 percent last month, reflecting a big jump in hiring by private sector businesses. The increase followed two 0.5 percent gains in February and March and was the strongest showing since a 4 percent jump in December that had been fueled by a big dividend payment from computer software giant Microsoft.

Consumer spending rose 0.6 percent in April, down from a big 0.9 percent jump in March. Analysts expect the economy to keep moving ahead at a good clip this year in part because they believe that rising employment will provide support for consumer spending.
Of course, it's always best to read the fine print rather than take economics writers at the news wires at face value. First of all, we should put these figures into real rather than nominal terms. While nominal personal income was indeed up 0.7% in April, real personal income was up a smaller 0.5%.

More importantly, real disposable personal income -- the kind that people can actually save (yes, I laughed myself there, too) or spend -- was up a much more humble 0.1%. And despite the supposed good news on consumption -- up a robust 0.6% in nominal terms but still below income gains -- real consumption growth in April was 0.2%. Thus, Americans continue to increase their consumption faster than they are increasing their disposable income.

If we really want some good news from this picture, look at the closing gap between real disposable income growth and real consumption growth. In February the gap was -0.2% (i.e. real disposable income grew 0.2% slower than real consumption) and in March a larger -0.4%, while in April it's shrunk to -0.1%.

But that kind of real news is rather weak tea if you're looking to trumpet the American economy.

You know, it just had to happen this way. When my family and I arrived at the end of January we needed about $1.88 to buy a pound. Things got so bad in early March that pound was up to $1.93 and I feared for our bank account. Yet now, less than one week before we leave the UK and return to the States, the dollar decides to put its rally cap on. As I look at Bloomberg today, I see that the USD/GBP exchange rate stands at $1.8256. The dollar hasn't been this strong in the UK for seven months. Figures I'd be spending my four during the dollar doldrums.

And it's not just against the pound that the dollar is rallying. It wasn't long ago that people were predicting a euro worth $1.40 and a dollar worth less than �100. Yet today the euro is at just $1.25 and you need almost �108 to buy a buck. The broad dollar is at its highest point since early November 2004 and seems to have confidently broken upwards out of the range it's traveled in for the last five-and-a-half months.

I must admit that I was a dollar bear symp back in the winter of '04-'05, mainly because I believed long-term structural forces would be stronger than short-term cyclical forces. Clearly the later have carried the day.

For the first quarter of 2005, US non-petroleum imports are growing at a 13.9% clip; total goods exports at only a 10.3% rate. That stronger dollar should keep imports flooding in to the country regardless of the boil coming off the oil markets (for now) considering the personal savings rate for 2005:I is at a near-rock bottom of 0.9% and has been especially weak -- at a mere 0.5% -- over March/April.

Let the contradictions increase!

Wednesday, May 25, 2005

The latest OECD Economic Outlook has some advice for the major central banks of the world.

The United States alone is targeted for tighter reins on the money supply.
Although some of the monetary stimulus has been removed, further tightening is needed to contain emerging inflationary pressures, not least because long-term interest rates have remained surprisingly low.
For the rest, however, the call is "cheap money, ho!". And the United States cannot fail to reap the cheap money harvest as well.

For Japan,
quantitative easing should continue until inflation is sufficiently high so as to make the risk of renewed deflation negligible.
For the European Central Bank,
With inflation declining and a large output gap prevailing in 2006, there is room to easy monetary policy, even though liquidity will have to be withdrawn again once the recovery is firming towards the end of the projection period.
For the UK,
Despite the recent pick-up in inflation, weakening growth prospects suggest that monetary tightening will not be required to maintain inflation close to the target.
And for Korea,
Monetary policy should maintain its expansionary stance until domestic demand recovers
Does anybody else see the problem in this list of recommendations? First and foremost, it assumes a world of national economies. And yet the evidence of the past three years is that the United States, perhaps uniquely, is able to suck cheap money from all corners of the globe. Events have demonstrated that the Federal Reserve not only has no control over long-term US interest rates -- witness Chairman Greenspan's well-known befuddlement over the behavior of long-term rates -- but precious little control over key short-term interest rates as well. Think of rates on one-year adjustable rate mortgages, two-year Aaa corporate bonds and two-year municipal bonds and you'll see what I mean.

The Fed raising the federal funds rate has no necessary effect on US interest rates in a world awash with cheap money. And following OECD advice, the world will continue to be flooded with cheap money from every quarter save one. Even non-member China promises to be a continual source of funds for the US corporate and housing sectors, so says the OECD:

Going forward, domestic demand may slacken but rapid export growth will limit the slowdown and produce a marked increase in the current account surplus.
A surplus ready and able for investment in the US. Put on top of that oil prices staying well above $40/barrel and you have the OPEC countries as well stuffing suitcases with petrodollars for investment into the US treasuries market.

Look for the contradictions to increasingly heighten in the months to come.

I suppose this is the new definition of a "hot" real estate market.
It feels as if Playboy's Playmate of the Month for May is speaking for the entire country.

Fort Lauderdale native Jamie Westenhiser, 23, told the magazine recently that she is ditching her modeling career to take up real estate investing.

In the magazine's May issue, Westenhiser poses in her lacy lavender baby doll, wearing nothing else except furry boots, leaning on a computer desk next to a stack of books with titles including "All About Escrow" and "Real Estate Principles." In her "playmate data sheet," she writes that her ambition in life is to have a "successful career in real estate."
Real estate driving the grapevine at the grocery store these days is one thing, but when escrow becomes sexy, one can be certain that the country has gone completely stark-raving mad.

And it's not just the borrowers. Lenders are equally caught up in the madness.
Banks have noticed the increase in investment buying and some have stepped up efforts to bring in investor borrowers, which takes the risk to a new level.

"Some banks have just recently come up with interest-only loans and new adjustable-rate programs for investors to help them manage the increases in home prices," said Steve Calem, a mortgage broker in Bethesda. "They're giving better interest rates on investment properties than they used to. I can even do 100 percent financing on an investment property now, something that was just not possible not that long ago." . . .

Mortgage broker Calem said if an investor has good credit, banks will do "no-document" loans, where a borrower's ability to repay the loan is judged solely by his credit history rather than on income and assets.
With all this reckless lending going on, passage of the big bank-friendly bankruptcy reform bill a few years ago takes on greater and greater importance.

Monday, May 23, 2005

The end of the indefatigable-consumer-and-property-bubble-fueled economic boom in Britain appears to be nigh.
Between 1997 and 2004 - the first seven years of Labour's period in office - the UK consumer did Britain proud. Over this period, consumer spending rose at a robust 3.5 per cent a year in real, inflation-adjusted terms. That's quite a lick. Since 1948, consumer spending growth has averaged a mere 2.6 per cent growth a year. So UK consumers - other than those who are scared of the Bluewater hoodies - have truly never had it so good. . . .

Seven years of feast, you might be tempted to say.

And, as with that first biblically recorded business cycle, perhaps we are now about to get the famine. . . .

John Butler, HSBC's UK economist, estimates that 70 per cent of the jobs created in the UK since 1997 have been directly related to the consumer and property boom, through high-street retailing, banking and construction. The slippage in the housing market, presumably a response to the Bank of England's earlier monetary tightening, may have been the trigger for the latest period of weakness, but we may now be on the verge of a classic downward multiplier, whereby an initial shock leads to weaker consumer spending, lower employment and, hence, even more consumer retrenchment. . . .

Consumers may now, at last, be recognising that their apparent riches are more illusion than reality. Having borrowed on the basis of the dream, they are now waking up to a reality that's more hangover than hope. Asset-price gains can make any of us feel rich. But unless the output comes on stream to justify those gains, our wealth will be no more than a house of cards, a transitory moment of monetary froth.
The recent parallels between the UK and the US are significant -- rampant consumption growth, housing bubbles, huge trade deficits -- not to mention the larger structural similarities as the two signature products of the Reagan-Thatcher revolution.

One big difference has been the two countries' interest rates, both level and direction. Current the Bank of England has rates at 4.75% while the Fed has just recently made it up to 3.0%. In mid-2004 the BoE was at 4.5% while the Fed was still pumping up the volume with its 1.0% offer. Finally, the BoE has kept rates stable since August 2004 over which time the Fed has raised rates seven times by a cumulative 175 basis points.

At the same time, it might simply be that the Fed is operating in sync with the BoE but with a time lag. All indications are that the BoE has topped out and may even start dropping rates if economic conditions in Britain really turn southwards. The continuing housing bubbles across the US will keep the Fed wary, but how long can they go on? We know from recent IMF research that housing bubbles are now global -- and the evidence is pretty solid that the bubble has at least fully deflated in the UK -- if not on the verge of bursting.
U.K. house prices dropped for the 11th straight month in May, Hometrack said, adding to concerns that higher borrowing costs are sapping demand for property. . . .

``The forecast for the next couple of months looks set to remain dreary,'' said John Wriglesworth, Hometrack's housing economist. ``The ongoing market malaise has caused us to revise our house price forecast for 2005 from 3 percent to 0 percent.'' . . .

The bank cut its U.K. economic growth forecast on May 11 and Governor Mervyn King said that house-price inflation has ``fallen markedly,'' fueling speculation the next move in rates may be down. Sluggish home prices mean fewer people are moving or borrowing against the value of their homes, slowing consumer spending.

A report from the Royal Institution of Chartered Surveyors On May 17 said house prices fell in April, while sales in the market were 30 percent lower than a year earlier. U.K. mortgage lending last month grew the least since February 2002, the British Bankers' Association said on May 20.
The first sign of the end of the bubble is markedly falling sales volume, and we're already beginning to see that in California and Nevada. How much longer until this UK story can be written for the US?

Sunday, May 22, 2005

While homeowners across the United States have been loving the housing bubble which has dramatically driven prices up in some markets more than 30% a year (thus providing a comfy equity cow to milk through low adjustable-rate refinancing for enhanced consumption), the flip side of this bubble is proving less popular -- dramatically rising property taxes.
Soaring property taxes are a top worry in state legislatures across the country, where lawmakers are trying to appease disgruntled homeowners and, in some cases, courts that are demanding change in the system so schools are more equitably funded.

Some states are weighing plans to lower taxes. Others just want to keep them from rising too fast. Still others are aiming to substantially change the tax system and find another way to help pay for schools that closes the quality gap between wealthy and poor communities. . . .

"Property tax relief is the mantra of the day," said Bert Waisanen, an analyst at the National Conference of State Legislatures who tracks tax policy. "States are acting to provide as much additional relief as they can afford to."
The housing market has been particularly bubblicious in the west, none as bubbly as Las Vegas where prices are up 29.4% over the last year and a stunning 90.0% over the last three years. In the casino capital, property tax rates are 77.92 cents per every $100 of assessed value. So back in early 2002 the owner of your average Vegas home was paying $1192.95/yr. in property taxes, while in early 2005 the bill has jumped over a thousand dollars to $2267.47/yr. According to HUD, Las Vegas median family income over the same three-year period rose some $2250, so property taxes alone are eating up around half of the income gain.

As a result, we're beginning to see miniature Proposition 13 movements across the west once again. Last month Nevada passed a law capping annual tax increases on owner-occupied single-family homes in the state to 3% a year, while some are angling for a constitutional amendment limiting it to a mere 2% a year. Clearly middle class Las Vegasians (is that what residents of Vegas are?) want all the gravy that comes from a housing bubble but none of the washing up.

Friday, May 20, 2005

This story has "bubble" written all over it.
One of the few things increasing faster than house prices in California is the supply of agents licensed to sell them.

More than 22,000 applicants took the state's real estate exam in April, nearly three times as many as in April 2003, according to the Department of Real Estate. To handle the surge, the department has rented six test centers around the state to supplement the five it already has.

The last time so many people wanted to sell real estate in California was in 1990. In what might be an ominous sign for the current boom, that year marked a peak in the housing market. . . .
Consider this contradiction: the number of new would-be real estate agents in California increased nearly 300% (and the number of total agents by some 20%, as you'll see below) over the same period that the number of houses sold in California declined 2%. This drop puts the Golden State in the avant garde of US housing market bubbles. Next-door Nevada saw the number of houses sold from 2004:I to 2005:I tank a stunning 10%. Watch Las Vegas as well.
"I didn't want someone else to get rich while I did all the work," [Silicon Valley real estate agent Joseph Petralia] says. "I'd rather put in the effort and see the results myself."

Justin DeSantis, his buddy in the next cubicle, concurs that tech is a bad bet: "Only one out of 20 dot-coms makes it."

A former personal trainer, 31-year-old DeSantis likes the unlimited potential of real estate. . . .
The echoes of 2000 are deafening.
There are 165,000 Realtors in California, an increase of 49% since 2002. Only a handful of other fields is growing faster, including debt collection and waste collection, according to the state Employment Development Department. . . .
Funny to see real estate right up there with debt collection. Those interest-only loans do have a unique way of bringing these two fields together . . .
"Everybody loves real estate now. It held up when many people were losing money in stocks. People talk about real estate in the grocery stores. That drives interest in the industry," said Janet Case, executive officer of the Silicon Valley Assn. of Realtors and herself a tech refugee. . . .

. . . the new agents keep coming. Six years ago, people gave up good jobs for the excitement � and stock options � of Internet start-ups. Now some are leaving good jobs with tech companies because they find more thrills in real estate.
Just as John and Jane Public followed stock quotes more closely than box scores in the late 1990s and made MSNBC anchors household names. This market is attracting speculators of every type, something which has even made Alan "Mr. Sunshine" Greenspan sit up and take notice. As Bloomberg writes,
A survey of the Realtors group released March 1 found that 23 percent of homes sold in 2004 were purchased by investors.
In hot spots like California, this figure has to be much higher, driving prices through the roof. Per the National Association of Realtors, the "affordability index" of houses in the West in March was 88.0; a year ago it was 105.7. The national figure is 129.4.

If real estate is setting tongues wagging in the grocery stores, you know the Day of Reckoning can't be far off.

Fanatical Muslim terrorists are not coming to get us.

Since the entire foreign policy of the United States is, since the National Security Strategy of 2002, entirely founded upon the premise that bearded Middle Eastern evil-doers are in fact coming to get us and are lurking out there on the periphery of our borders just waiting for the opportunity to strike a second and more spectacular 9-11, I do not make such a statement lightly. That being said, I have long been very suspicious of the widespread belief throughout the US that terrorists are about to strike. In fact, since late 2001 I have really not believed -- I can point to the whole Richard Reed bombing attempt as the beginning of my disbelief. If an incompetent like Reed was the al-Qaeda second string, we didn't have much to fear.

Two recent events have pushed my quiet disbelief into open heresy. The first was the May 11 ariel tour of downtown Washington, DC by Jim Sheaffer and Troy Martin in their Cessna 150. These two lost, confused and scared pilots flew right over the Vice President's residence and were within three miles of the White House. If sheer incompetence could get these guys so close, just think what determined and skilled terrorists of the caliber of Mohamed Atta could accomplish. And yet they've never even tried. They're willing to blow themselves up in Iraq, but they've never even tried a serious attack in the US since the Reed shoe-bombing attempt.

The second is the announcement from the FBI yesterday in Senate testimony that groups like the Animal Liberation Front and the Earth Liberation Front are "One of today�s most serious domestic terrorism threats".
John Lewis, the agency's deputy assistant director for counter-terrorism, told a senate committee in Washington that the militant groups were "way out in front" in economic damage. He also suggested it would not be long before loss of human life was added to their tally of crimes.

"There is nothing else going on in this country over the past several years that is racking up the high number of violent crimes and terrorist actions," he told senators . . .

The chairman of the senate committee, the Republican James Inhofe of Oklahoma, added to the sense of alarm, agreeing with Mr Lewis that killings might be next. "The danger of ELF and ALF is imminent," he said. "Although they have not killed anyone ... it is only a matter of time until someone dies as a result of ELF and ALF criminal activity."

And evoking language more normally heard in connection with al-Qa'ida, Senator Inhofe urged the FBI to seek out the money pipeline funding the groups.
If the FBI's top domestic terrorist threat is groups that have yet to kill a single person and have no apparent interest in intentionally killing anyone (although their use of explosives certainly has the potential to cause accidental deaths), then al-Qaeda "comin' to git us" has long since passed into the realm of myth.

Thursday, May 19, 2005

As the header on this blog indicates, the name of the game in today�s global economy is glut � generalized overproduction. The natural symptom of overproduction is price disinflation or outright deflation at the consumer level. As too many goods and services chase too few dollars (or euros or, as we see today, renminbi) in the hands of consumers, down come prices. And as prices stay low, central banks find the justification to keep interest rates down as well. The result is the odd combination we see today � nearly non-existent consumer inflation combined with out-of-control asset inflation.

Have a look at consumer inflation data in the major national economies. Thanks primarily to energy prices, CPI in the US is currently running at a 3.7% annual pace, but core CPI is a mere 2.2%. The recent energy price hikes have the 3-month annualized rate at a rather torrid 6.6%, but core inflation remains a rather reserved 2.2% annualized. That�s two consecutive months of disinflation in core prices and an amazingly stable ~2.2% core inflation rate over the last six months. If you don�t like the CPI data, try on Personal Consumption Expenditures inflation for size which calculates price changes over the entire consumer end of the economy rather than through a basket of �typical� consumer goods. According to the latest PCE data, the overall annual inflation rate is a comfortable 2.4%, while core PCE inflation is running at a mere 1.7%, a rate stable since November.

The story is much the same in Europe. In April the HICP in the EU-15 was running at a tepid 2.0% annual rate and only slightly higher (2.1%) in the eurozone. In the three biggest European economies April inflation rates were 1.0% in Germany, 1.5% in the UK and 1.9% in France. Note that all these rates include food and energy as well; their core rates are surely much lower than even this, dangerously close to or even below the deflation stall speed of 1.0%.

It goes without saying that Japan is still experiencing consumer deflation and even China�s torrid economy is cooling off � at least on the consumption side.
According to Chinese figures released this week, inflation has slowed significantly - with consumer prices just 1.8 percent higher in April than a year earlier. Inventories of unsold goods are rising at steel mills and other businesses, and imports of iron ore and many other raw materials have slipped. While exports remain extremely strong, domestic economic activity has moderated.

Beijing officials have imposed administrative measures that seem to have been surprisingly effective in controlling a potentially overheated economy and inflation.
Chances are that the June meeting of the Federal Reserve will produce the last 25 basis-point rate hike for the near future. With all the gloom coming out of the UK�s high street and housing markets, a rate cut is even in the cards from the Bank of England. It would be suicidal for the European Central Bank to hike interest rates in the midst of Germany�s economic funk, and thanks to continuing price deflation nominal interest rates will remain near zero for some time to come in Japan.

More cheap money to fuel more property bubbles; more consumer price disinflation keeping the masses satiated with cheap stuff. The formula which has defined the 21st century thus far promises to keep performing for a while more yet.

Korea makes yet another stab at breaking free of the bad marriage known as Bretton Woods II.
South Korea's central bank will not intervene any further in foreign exchange markets, the governor of the Bank of Korea said on Wednesday in comments likely to unsettle financial markets.

�I believe that we now have sufficient reserves to secure our sovereign credibility, so I do not anticipate increasing the amount of foreign reserves further,� Park Seung told the Financial Times. South Korea's foreign currency reserves stand at $206bn the fourth largest in the world.

Mr Park said: �We now need to take more consideration of profitability, and I think we're at a stage where we need to manage our reserves in a more useful way.�

Although he made no explicit comment on the won, Mr Park's remarks imply that South Korea is now unwilling to undertake the intervention required to stem its currency's rise.
The last time the Koreans tried to leave the dollar, in February 2005, the won shot up over 1.2% in a single day and the country came crawling back home almost immediately. It was all over before it started.

There's already been plenty of currency pain to go around for Korea this year. Over the last twelve months the won has risen 17% against the dollar -- and thus against the renminbi as well. Letting the market take over the won could mean +17% is a fond memory.

Do the Koreans really mean business this time? Can they stand the pain for more than one day this time around?

Thursday, May 12, 2005

For the most part I try to stay away from the libertarian econoblogs. Summaries of their posts on the Economics Roundtable is usually more than enough for me. However, but this comment today by Don Boudreaux at Cafe Hayek was just too rich to pass up.

Any measure of country A�s trade relationship with country B is completely meaningless; it�s useful only for demagoguery. Even if the U.S. were to have a zero current-account balance with the rest of the world � no current-account deficit or surplus � it would be freakishly coincidental if the U.S. had no current-account deficit with each of several individual countries.

The old-but-wise economists� example applies here: I routinely shop at supermarkets, but I don�t work at supermarkets. Therefore, my current-account deficit with supermarkets is long-lasting. It will never disappear; indeed, it will grow until the day I die. Ditto for my trade relationship with clothing retailers, dry cleaners, auto producers, restaurants, airlines, computer makers, pharmaceutical companies, pet stores, wineries � the list is endless.
I can't help but throw Friedrich List back at these worshippers of "cosmopolitical" economic theory.
Is the wisdom of private economy, also wisdom in national economy? Is it in the nature of individuals to take into consideration the wants of future centuries, as those concern the nature of the nation and the State? . . .

No; that may be wisdom in national economy which would be folly in private economy, and vice vers�; and owing to the very simple reason, that a tailor is no nation and a nation no tailor, that one family is something very different from a community of millions of families, that one house is something very different from a large
national territory.

Kash at Angry Bear thinks
clearly the US still does have a substantial comparative advantage in the production of agricultural products
The evidence seems to be the fact that the US export/import ratio for agricultural products is well above the country's X/M ratio overall (for 2005:I, 0.90 vs. 0.55 respectively). This broad-brush comment could seriously use a closer look.

First of all, the US export/import ratio for agricultural products is declining, so if the US does indeed have a comparative advantage, it is dropping markedly.

Second, the high ratio for agricultural products is really a hodge-podge of radically different ratios, some of which are quite favorable and others which show the US agricultural advantage to be about as good for consumer goods.

The US Foreign Agricultural Service through its BICO system breaks down US agricultural exports and imports into three main categories: bulk, intermediate and consumer-oriented products (hence the name BICO). It also collects and reports trade data on two other related categories: forest products, and fish & seafood. For these five categories, the US shows a comparative advantage per Kash's methodology in only two groups -- and these are hardly the most economically lucrative ones.

Over the last six months (October 2004 to March 2005), in bulk agricultural commodities (e.g. grains) the US X/M ratio is a heady 3.9; in intermediate products (e.g. oils) a less heady but still export-surplus-indicating 1.3. When it comes to the high value-added category of consumer-oriented agricultural products, however, the comparative advantage melts away, to an X/M ratio of a mere 0.65. Categories like red meat, dairy, fresh fruit, fresh vegetables and wine/beer are particularly weak -- but who eats any of that when there's all that sorghum to munch down!

And don't look to trees or the seas for any help. Forest products come in at a weak 0.25, and fish/seafood a similar 0.31.

So when it comes to growing wheat and grinding it up into flour, the US can do it like nobody's business. When it comes to turning it all into ChexMix, however, capital is turning elsewhere.

Everyone seems to have been caught off guard by the relatively (and I do stress relatively) small US trade deficit for March 2005: a mere $55bn compared to a consensus forecast around $61bn and a worst-case-scenario from Brad Setser of $65bn.

So what happened? Part of the answer seems to lie in US non-petroleum imports, which fell dramatically -- at least on a seasonally-adjusted basis -- from $117.2bn in February to $112.3bn in March. By end-use category, consumer goods imports took the brunt of the hit, dropping from a whopper $35.1bn in February to $32.7bn in March. Auto sector imports also fell markedly, from $20.0bn to $18.7bn. (The end-use numbers don't sum up to the non-petroleum total, FYI). Is the big US consumer slow-down finally upon us?

Let's look at the non-seasonally adjusted data. Y-o-y consumer goods imports to the US are up just 3.3% for March while all goods are up 9.8% y-o-y. The non-seasonally adjusted data broken down by SITC shows import drops in March for top consumer goods categories such as clothing, footwear, furniture/bedding, lighting/plumbing and toys/games/sporting goods (but not TVs). No surprise then that goods imports from China fell in March by $0.74bn (NSA) -- the only major trading partner with which the US experienced an import drop in March.

To be fair, the fall in the overall deficit was also thanks to the largest monthly services surplus since April 2004. At $4.4bn, the services surplus was mainly reliant upon a big jump in services exports ($0.5bn), made up by travel services (+$0.18bn), other private services (+$0.19bn), and non-passenger-fare transportation services (+$0.13bn). A foreign tourist boom capitalizing on the weak dollar?

When taking in the big picture, however, clearly the significant drop in the overall deficit for March is due almost single-handedly to a drop in consumer goods and auto-related imports from China. There is clearly something fishy going on here.

Wednesday, May 11, 2005

On 11 October 2004, Stephen Roach opined,
In the end, the nature of the oil shock is the biggest wildcard in all this. Many are inclined to dismiss the recent run-up in oil prices as a non-event insofar as macro impacts are concerned. A common pushback I hear is that since oil prices are still low in real terms -- in fact, well below levels of the early 1980s -- they aren�t squeezing consumers. Yet macro tells us that price changes matter more than levels: At $50 on a WTI basis (now well below the latest quote of $53 on 8 October), the real oil price is fully 66% above the average that has prevailed since early 2000. That�s a shock in my book. Then there is the view that I always hear around oil-shock time -- that energy conservation has reduced the importance of oil in the macro equation. Try telling that to over-extended consumers.

Duration is obviously key in all this. If the oil price quickly reverses course, its shock effect will recede just as fast. I have stressed the three-month time threshold as the functional equivalent of a psychological breaking point.
Those following the bouncing ball closely will remember that back in Fall 2004, WTI spot prices closed above $50/barrel for only one month and then proceeded to fall back rapidly. By 10 December oil (WTI spot price) closed at a mere $40.71/barrel and the "oil shock" threat became just a bad memory.

Fast forward to 22 February 2005 when spot prices closed above $50 once again. This time, however, except for a few brief blips under the magic level, prices have remained consistently buoyant above the $50/barrel mark and in less than two weeks will have reached Roach's magic 3-month "psychological breaking point".

Tuesday, May 10, 2005

The Big Slowdown appears to have arrived in the United Kingdom. Manufacturing output is down, retail sales are down, home sales are way down. As a result of the mounting gloom,
Speculation that the Bank of England will be forced to cut rates despite its worries about inflationary pressure rose yesterday as analysts said evidence was mounting of a widespread economic slowdown.

The Bank's Monetary Policy Committee voted to leave rates on hold at 4.75 per cent yesterday, but traders rushed to place bets on a cut before the end of the year.
I would agree that the chances of a Bank of England rate cut are high in the short-term. And that means more cheap money sloshing around the global economy for the US to absorb!

Case in point: government debt interest rates. Currently the yield on a 10-year US treasury is 4.27%, whereas in the UK the yield is 4.51%. If a 25 basis point cut drops the UK 10-year around that much, then -- voila! -- the US becomes a more attractive place to plant your excess capital.

Make no mistake. Britain is a big net importer of capital. In 2004 the world sank �84bn into UK portfolio investments, and British investors made �137bn in investment income from abroad. That's around $420bn of capital which the US could begin tapping later on this year if US rates continue to rise and British rates fall.

Monday, May 09, 2005

In comments on my Friday posting re the US "house-producing economy", Cynical Investor said,
Actually the only thing we are trading for foriegn goods is dollar based debt secured by real estate.
Since the "export" of housing by highly financialized Anglosphere economies is a particular interest of mine, I'm curious to hear opinions as to the difference between seeing the sale of mortgage-backed securities (MBS) as [1] the sale of debt backed by real estate; and [2] the sale of the houses themselves. Now granted, the owner of an MBS does not actually own the house so much as own the income flowing from the house. But is there much difference when it comes to the macro-economy and the ability of a population to exchange overpriced real estate (or the income flows thereof) for goods and services?

Cynical Investor goes on:
If enough of that debt is owed to foriegners and if enough homeowners cannot afford to pay off that debt I have confidence that US politicians will either: 1 - debase the dollar or 2 - reschedule the debt in some other way. This whole exercise is a test of the US's capitalist system - i.e. will we pay off debts to foriegners after having our party. Somehow I don't think we will.
I think the chances of a dollar debasement are low. Finance capital won't sit on its hands forever, after all. However, I agree that the likelihood is certainly greater than zero what with the Bush administration in power. Debt reschedulement is very likely in my view, however, especially since the US is the biggest baddest debtor on the block. If Argentina can push creditors around the way it has, just think what the US can do!

The big US employment news of last week was the robust gain in jobs in April.
Hiring around the country picked up briskly in April, with employers boosting payrolls by 274,000 and raising hopes of better days ahead for jobseekers and the economy as a whole. The unemployment rate held steady at 5.2 percent.

The latest snapshot of the nation's employment climate, released by the Labor Department on Friday, eased fears about the economy getting stuck in the soggy spot it hit in March.

April's payroll growth marked an improvement from the 146,000 new jobs created in March. Economists also were heartened to see that revised figures showed employers added 93,000 more jobs in February and March combined than the government previously estimated.

"The economy appears to be snapping back and the soft patch has probably evaporated," said Lynn Reaser, chief economist at Bank of America Capital Management. "Jobseekers can now look forward to a more receptive climate. We are seeing jobs open up over a wide swath of industries."
So, has the US economy finally turned the corner on employment � and by extension, wages? Not so fast.

The big job gains in April were distributed across the board � excepting manufacturing, which has been steadily losing production jobs all year and shedding total jobs for three of the last four months now. The gains were concentrated, however, in two sectors � construction and leisure/hospitality � which made up nearly 40% of the net total. Construction had its best month since March 2004 and its second best since March 2000, while leisure/hospitality saw its biggest monthly gain since January 2003.

The dominance of these two sectors means we need to take April�s job jump with a grain of salt. Construction is, of course, heavily influenced by interest rates, and continuing low real rates are fuel to the building fire. The entire good-producing sector generated 45,000 new jobs, with construction contributing 104% of the net total! If the US economy can export all that real estate, then the capital account surplus swells � and it�ll need to in order to balance the current account deficit which will only continue to erupt.

The story of leisure/hospitality is the story of booming American consumption. 42,000 of the 58,000 new jobs in this sector came in accommodations and food services, and since the sector�s most recent low in June 2002, employment in leisure and hospitality has expanded by 823,000, with 80% of the gain being in food services alone. Now, a job is better than no job, but the US economy isn�t going to sail ahead on the backs of caterers, wait staff and bartenders.

The leisure/hospitality sector, after all, is the lowest paid industry in the country. In March 2005 production workers made on average just $9.09/hr.. Wages in construction are much higher, of course � $19.27/hr. in March � but the real average wage for production workers in this sector is actually falling, down a remarkable 2.0% over the last year. No other industry has seen real wages fall as far.

Indeed 274,000 new jobs is good news for the US economy. Just not nearly as good as we might be led to believe.

Friday, May 06, 2005

In my view, any definition of a "hard landing" for the US economy in the face of a major adjustment on its current account has at the very core a reduction in real consumption. This is not simply a reduction in the growth rate; I mean an absolute decline. With the CA balance a whopping -6.3% of GDP in 2004:IV and surely sinking to well under -6.5% in 2005:I, there is no avoiding the pain now.

Stephen Roach thus hits the nail squarely on the head today when he says,
It is only a matter of time before America�s external deficit is rebalanced. When that happens, the US will need to reduce consumption � undermining the major driver of China�s externally led growth dynamic.
The last time US personal consumption expenditures fell in real terms for two quarters in a row was 1990-91; before that, we're all the way back to 1980; and before that, 1973-74. These are the days the US is going to have to relive.

The hard landing scenario is inevitable. The only question is "how hard?".

On Tuesday of this week, Kash of AngryBear made an observant quip which has caught fire in the center-left economic blogosphere:
Month by month, the non-service portion of the US economy has slowly been evolving from a goods-producing economy into a house-producing economy...
Brad Setser picked up on it and so did Brad DeLong. In fact, the quip even made it onto Business Week's blog.

Indeed, housing has become the cornerstone of the US economy since the popping of the tech bubble. In 2001 and 2002, residential fixed investment was the only expanding investment sector, and even in 2003 housing absorbed over half of all US fixed investment. The last time we saw such a condition was 1992, but that followed four straight years of declining investment in housing and was simply a one-year blip on the screen. Before that we're back to the mid-80s when housing again dominated the American investment scene. Yet back then, residential investment never contributed more than 5.0% of GDP whereas since 2003:I housing has steadily contributed more than 5.0%.

In 2005:I this level grew to tremendous levels: 5.8% of GDP, a figure not seen since 1978, and before that all the way back to 1955. Of course, the difference between now and then is that then the US economy did not rely so heavily on consumer spending. Housing plus consumption totaled around 68% of GDP; in 2005 we're at 76%. Considering so much contemporary consumption is fueled not by rising wages/salaries as back in 1978 or 1955, but instead by withdrawing home equity, the reliance of the entire US economy in 2005 on housing is incredible.

And one shouldn't forget the relative demise of the production of things versus the production of houses since the 1980s, much less since 1978 or 1955. In 2004 all manufacturing industries contributed just 12.7% of industry value added in the country, down from 17.2% as recently as 1988. Construction and real estate services combined have grown from 15.8% in the early 1990s to 17.0% in 2004.

The magic, of course, is that the US has figured out a way to sell our houses to anyone and everyone via mortgage-backed securities, especially as an export. So the US buys foreign goods and sells our housing stock in exchange. As we run larger and larger goods deficits and smaller and smaller services surpluses, we need to build -- and export -- more and more houses! The shift of the non-service sector of the US economy away from producing goods is simply the flip side of the move toward producing houses instead. They go together, hand-in-hand.

Wednesday, May 04, 2005

Well, that's one way to get long-term interest rates up.
U.S. Treasuries maturing in five years or more fell after the government said it is considering resuming sales of 30-year bonds for the first time since 2001.

The prospect of additional supply of longer-maturity debt pushed the so-called long bond to its biggest decline in almost two months. As recently as last month Treasury officials said they had no plans to bring back the security.

``It definitely caught the market off guard,'' said Joseph Shatz, a government bond strategist at Merrill Lynch & Co. in New York and one of the 22 primary dealers of U.S government securities that are obligated to bid at the Treasury's auctions. ``I don't think anybody was prepared'' for today's announcement.
As I type the 10-year is up to 4.23%, rising over 1% today. Now this is still nothing compared to where it was in late March (~4.6%), but one has to wonder if the ultra-low ten-year yields can last with the 30-year on the way. And more importantly, what will this do to mortgage rates which tend to move in tandem with the 10-year? After all, it was late March when the 30-year FRM topped 6.0% for the first time since July 2004.

Keep your eyes peeled. The Bush administration just might flood global debt markets yet.

Tuesday, May 03, 2005

Two booms begat four, and four begat more, and pretty soon the place was covered in little boomlets as thick as kudzu.
The number of areas across the United States with real estate booms grew nearly two-thirds last year to 55, the Federal Deposit Insurance Corp. said, warning that these booms may be followed by busts.

The boom areas represent 15 percent of the 362 metropolitan areas the Office of Federal Housing Enterprise Oversight analyzes, the highest proportion of boom markets in 30 years of price data and more than twice the peak of the late-1980s booms.

Boom areas were defined as having inflation-adjusted prices at the end of 2004 that were up 30 percent or more in three years.

Adding recent data and analysis to a study released in February, FDIC economists Cynthia Angell and Norman Williams repeated their view that credit market conditions may make current housing market booms different than past ones, which have tended to taper off rather than bust.

"To the extent that credit conditions are driving home price trends, the implication would be that a reversal in mortgage market conditions � where interest rates rise and lenders tighten their standards � could contribute to the end of the housing boom," they say.
All the more reason to believe that the Fed may be very near the end of its tightening phase. For all the talk of inflation in the US economy today, note that annual PCE inflation is running at a tepid 2.4% -- and the six-month annualized rate is just 3.0%. Only total lack of perspective or sheer insanity (aka ideological commitment to "sound money" at all costs) would cause anyone to think an inflation rate below 5% was "high". Of course, housing price inflation is through the roof, but since this has for five years now been the flying buttress of the US economy, there is no way that Alan Greenspan is going to play Solomon as his final act.

As long as the Europeans and the Japanese are committed to cheap money, the US will draw capital to itself quite comfortably with fed funds rates of 3.0%-3.5%. Continued Japanese stagnation and European malaise promise the continuation of a nice interest rate gap between the US and these markets -- and thus the little boomlets continue to breed like rabbits.

In his commentary yesterday, Stephen Roach agreed that the end of the Fed's interest rate hikes was most likely nigh. The likely vent for global imbalances, thus, comes down to the dollar.
If US real interest rates don�t rise, rebalancing should swing to the currency axis and push the greenback sharply lower. Such are the perils of the post-bubble trap.
But this assumes that the world will stop financing the US deficits. With the interest rate gap and the booming US property market, why not keep buying American? The contradictions are indeed mounting, but I don't see them reaching the boiling point this year.

30% home inflation rates aren't just for Las Vegas anymore! I'm comin' up so you better get this party started . . .

Ever since George W. decided to turn his efforts primarily toward domestic policy, the neocons holed up in the Pentagon and the Vice President's Office have been remarkably quiet or increasingly embattled. Douglas Feith resigned and was replaced by a career foreign service officer; Paul Wolfowitz quit for a "promotion" to the World Bank; and John Bolton is getting hammered by his own party in his quest to become ambassador to the United Nations.

Most notably, however, has been the relatively non-confrontational policy toward Iran. While the neocons have been crying for blood (of both Iranian mullahs and liberal US senators) for months now over the issue, the White House has done little more than give lip service to neocon dreams of furthering the "democratic revolution" in Iran, and when Ariel Sharon visited Bush in April down at the ranch, the rotund Prime Minister felt he had to strike fear back into American hearts which had become rather lacksadaisical over the prospects of a nuclear Iran.

All this is by way of prefacing the opening this week of the 2005 Review Conference of the States Parties to the Treaty on the Non-Proliferation of Nuclear Weapons (let's just call it the "NPT conference" for short). The Bush administration wants the talks to be all about bringing the hammer down on Iran; in the words of US Assistant Secretary of State Stephen Rademaker,
Today, the treaty is facing the most serious challenge in its history due to instances of noncompliance
Fair enough. North Korea and Iran both are in all likelihood violating the treaty. Yet many non-nuclear countries are eager to point out how the US is hardly a paragon of NPT virtue, either. The US stockpile of nuclear weapons has barely shrunk at all for the past ten years, and the Moscow Treaty -- which Rademaker touted yesterday as proof that the US is committed to "general and complete disarmament under strict and effective international control" (as the NPT Article VI requires) -- has been called by the Bulletin of Atomic Scientists
a sham, a "memorandum of conversation" masquerading as a treaty
Throw on top of that the Bush administration's refusal to sign the TEst Ban Treaty and its unilateral withdrawl from the ABM Treaty and you start to get the idea that Bush's only real interest is in keeping other kids out of the club, rather than shutting the club down.

Which is of course bad enough from Iran's point of view since it is clear the US is committed to "regime change" in Tehran. But then consider that Iran has for neighbors two nuclear powers -- Israel and Pakistan -- which are both close allies of the United States neither of which are signatories to the NPT and thus are completely free from the NPT's compliance regime. No wonder Iran is dancing the two-step.

If the United States was serious about nuclear disarmament, I'd find it a lot easier to support the Bushies' moral outrage at the Iranian nuclear program. As it stands, however, what the hell else would you expect the Iranians to do in this situation?

Which brings me finally back to the neocons. It is in their interests to ratchet up the diatribe this week at the UN, and the more shrill Rademaker becomes, the more evidence we have that the neocons are still throwing their weight around. But then actions speak louder than words; is the US going to send more spy planes over Iran nuclear facilities? Start more provocatives flights, looking for a fight? It is hard to believe that Ariel Sharon is simply sitting by hoping the Bush administration takes this all as seriously as he does; he's surely been pumping his neocon allies in Washington for months over it. Since the US has virtually no economic leverage over Iran do to a complete lack of ties with the country, pushing for sanctions in the UN is easy and costless. A more provocative military stance would speak volumes about the real power of the neocons in this second George W. administration.

Monday, May 02, 2005

A few weeks back I heartily seconded Andy Xie's belief that the party isn't over until the property bubble bursts. Well, mortgage rates in the US just won't rise, and the housing sector continues to stoke the flames of the US economy.

After topping out at 6.04% in late March, rates on 30-year FRMs are back down to 5.78% -- their lowest level since February. The 1-year ARMs which have been fueling the California housing market for the past two years have also scurried down from 4.33% in late March to 4.21% now.

Money continues to be dirt cheap. Even as short-term rates rise, long-term rates continue to be very low and the spiralling prices of real estate more than justifies (for as long as the bubble lasts) the borrowing expenses to build, add-on or buy housing. Hell, forget about reinvestment, just withdraw equity from your house to pay for a nice holiday in the south of France, as a bank ad here in the UK is encouraging British homeowners to do -- a wonderfuly American touch.

The party isn't over until the property bubble pops. With the Asians still intent on amassing US assets this year and the Fed sticking to its slow-go, barely-outpace-retail-inflation strategy of rate hikes, I don't see any pins being brought toward these bubbles anytime soon.

All eyes appear fixed on the renminbi this week -- has the moment of revaluation finally arrived? Market big-wigs surveyed by Bloomberg certainly think so.
The yen may advance for a fourth week against the dollar and the euro on speculation China is moving closer to letting its currency strengthen, a Bloomberg News survey shows.

Sixty percent of the 45 strategists, investors and traders polled on April 29 from Sydney to New York advised buying the yen against the dollar. . . .

Frank Gong, chief China economist at JPMorgan Chase & Co. in Hong Kong, said the government may alter its currency policy as soon as this week.
Currency traders think so, too. The yen rose 1.3% last week on the belief, the won by 0.7%, and the Taiwan dollar by 0.5%. According to Bloomberg, speculators are betting on a pretty significant 6% revaluation vis-a-vis the USD, which will surely spur major rises in other Asian currencies as well.

Questions remain, of course. The Chinese have been so adamant on refusing to buckle under any external pressure that the expectations of the market may easily be dashed this month. Giving signals � as some are interpreting last week�s 20-minute renminbi float � seems like the last thing China wants to do, encouraging every speculator and hot-money mover from Hong Kong to Hot Springs to bet against Beijing. If everyone is expecting a revaluation, isn�t such an environment the last one in which China will finally bow to the inevitable?