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Well friends, when it comes to the consumer who is, after all, nearly 70% of the economy it is and has always been about housing. Our culture prizes home ownership. Has since WWII and continues to do so. Tax policy promotes it. So when the value of our home is unstable, when it is under attack, we tend to circle the wagons. When we do that and stop spending 70% of the economy shrinks. This can happen literally overnight. When we don’t buy there is no need to manufacture, import whatever. Jobs are thusly lost. When jobs are lost the lowest rung of the economic ladder is the first to get hurt. They are the “sub-prime” borrowers. That caused the mortgage derivatives fiasco and the ensuing financial meltdown. Was Wall Street to blame? Sure, the derivatives idea was a bit fast and lose but it was based on the American Ideal that housing is very stable. It was actually Congress, who is now railing at Wall Street that actually encouraged the weird and risky packaging of mortgages as a method to make financing available to the lowest income, least credit worthy amongst us.
The good news after all these billions down the rat hole of big banks and uncompetitive car companies is that housing sales (or rather re-sales) are picking up a bit. They have been above last years numbers for two months in a row. This may be because of the $8,000 tax credit for first time buyers or it may be because the owners of re-sale houses have less invested by dint of long term ownership and can be more aggressive in setting selling prices that the market recognizes as appropriate. New construction has not had the same uptick likely due to the higher costs involved in new land development, materials and labor. Home builders are struggling to price as aggressively because they can’t afford such large mark downs. For example, the 20 year old home that the owner paid $240,000 for may be properly priced today at $499,000 while a similar sized home may cost the builder $550,000 to construct and should sell for $689,000 in order for him to make a normal profit. Aggressive builders may be willing to mark it down to $600,000 if it is already build and in inventory. That is still $100,000 more than the re-sale for essentially the same house. Makes it tough on builders, carpenters, plumbers, electricians, etc. It is a real drag on the economy. I started by saying the good news is that re-sale homes are above last year and that is good. It shows that there are people who are willing to take some risk. There are people who can be motivated by low prices and low interest rates. Had the government actually accomplished the repair of the housing fiasco in a timely manner maybe we wouldn’t have had the bank and auto debacle in the first place. Maybe instead of $8,000 for first time home buyers we should have a % of the purchase price of new homes to level the playing field and put those hard working trades people back to work. Then they can buy new trucks and their families can spend at the mall and pretty soon things will get back to normal without anymore government interference.
Afghanistan isn’t going well. Iraq is still a quagmire. The Russians are smiling not because they are in favor of the Taliban, but they tried to control Afghanistan for years and years and couldn’t succeed. They are chuckling at our temerity and wondering how will we get out of this one. We keep starting things we can’t and won’t finish. We keep sending young people into hostilities without the resolve to win and without the willingness to support them with unquestioning support. We want them to play by the rules when they face an enemy who doesn’t have any rules. Soon they we will repeat the chants of the 1960’s, “Hell no, we won’t go”. And then we will have a real problem.
Speaking of a problem, the Healthcare plan, love it or hate it, isn’t going to do one thing for the economy in the short term. I think the long term effects remain to be seen. I’m not optimistic but time will tell if I am right or wrong. I wish Congress would stick to the knitting and fix what is broken before getting all worked up about something new.
Speaking of something new, it comes apparently as a big surprise that Iran has been less than truthful about its nuclear program. A second enrichment operation deep underground presumably keep a secret to keep it safe from the Israeli’s. Former President Jimmie Carter and his former security advisor Zbigniew Brzezinski have stated that the Israeli’s have to have our permission to cross Iraqi no fly air space to reach Iran and that we should deny it. Brzezinski even went so far as to say if they enter it without permission we should stop them. Politically, the US firing on an Israeli air force mission is as unlikely as the US not defending Israel by selling them weapons systems. Practically, it might be a smart thing just to prevent complete destabilization of the region. This question could be moot IF the Russians and Chinese were to agree to enforce the anti proliferation treaty to which they, the USA and Iran are signatories. Sanctions of real significance could bring down the current regime in Iran. A new regime, supported by Russia, USA and China could be a very productive player in the region regardless of its religious ideology. The USA may have to learn the lesson that different doesn’t mean wrong. Of course Jimmie Carter allowed the Iranian revolutionaries overthrow the Shah
And capture our Embassy, holding 53 Americans hostage for 444 days causing the death of 8 American Servicemen in a failed rescue mission (and one unfortunate Iranian civilian). The hostages were released just minutes before Ronald Reagan was sworn in as President.
We missed the golden opportunity then, when we had justification to attack, the overrunning of an Embassy is considered an attack, an act of War. Now we lack moral authority. We cannot attack them without seeming the aggressor who will attack anyone who isn’t living our way. It worries our neighbors and our allies. Rightly so.
I think the president and congress should focus their attention on the economy so that we are again a strong nation prepared for whatever may come our way.
Friday, September 25, 2009
Tuesday, September 22, 2009
September 22, 2009
OK Blog Followers, here we go. It is September 22, 2009 and the economic outlook is cloudy. The clouds come from the mixed signals that I see out there.
First of all, the prices of houses is creeping up ever so little each month since June. The FHFA price index is still down more than 10% from the peak of April 2007 but it is slowly improving. A good sign pointing to recovery. There are still an enormous number of homes in foreclosure that have to been cleared so any price increase is amazing.
On the other side of the equation is the continuing rise in unemployment. This is so obvious and so daunting that Congress is being to work on a bill to extend unemployment benefits an additional 13 weeks in states where unemployment exceeds 8.5% which is probably all of them so support will be broad. Since the economy is nearly 70% consumer driven, the economic recovery will be very slow and halting. Up a little, down a little, then up a little more. Unemployment won’t decline until demand for products rise. Demand won’t rise until people with jobs feel more secure and people looking for jobs actually find them. It is a bit of the chicken/egg question. Then there is the credit (or lack of) question. The Government provided a lot of liquidity to the banking industry in hopes that it would spur lending. It did not. Banks are holding too much questionable paper on their balance sheets and are hording the money as insurance in case they have to face more defaults.
To add to the fog in my crystal ball there is the question of Afghanistan. The Military knows that it will take a massive surge to win and that doing nothing will bring defeat. The President isn’t sure that he wants to support a surge for fear of burdening the country with yet another costly and protracted military conflict. The Democrats are afraid they will be unable to move the domestic agenda forward if the have to fund a broader war, the very thing they railed at G.W. Bush about. Yet if they cut and run, they will be seen as soft on National defense which could cost them dearly in the next two elections. The democrats are learning what the republicans learned over the past administration. It is far easier to criticize and lament what could/should be than to govern.
China isn’t thrilled that the administration caved into special interest pressure and passed a tariff on tires to raise the cost of imported tires. Few, if any US jobs will be saved, you and I will end up paying more for tires and our biggest creditor, the Chinese, are irritated. It also sends a bad signal to the wider market that we talk free trade but, when times get a little tough, it’s every man for himself.
So where does all that leave us? We have an inexperienced President, surrounded by bright but young and largely inexperienced advisors. We have the biggest world wide financial crisis since the 1930’s taking place in an environment of technologically enhanced communications putting more information at out fingertips than ever before. Maybe we know too much, too soon for our own good.
All in all it seems that we are in uncharted waters and that we need to be extra vigilant as we move forward. We may not be able to control the speed of events so we have work extra hard at the vigilance part.
First of all, the prices of houses is creeping up ever so little each month since June. The FHFA price index is still down more than 10% from the peak of April 2007 but it is slowly improving. A good sign pointing to recovery. There are still an enormous number of homes in foreclosure that have to been cleared so any price increase is amazing.
On the other side of the equation is the continuing rise in unemployment. This is so obvious and so daunting that Congress is being to work on a bill to extend unemployment benefits an additional 13 weeks in states where unemployment exceeds 8.5% which is probably all of them so support will be broad. Since the economy is nearly 70% consumer driven, the economic recovery will be very slow and halting. Up a little, down a little, then up a little more. Unemployment won’t decline until demand for products rise. Demand won’t rise until people with jobs feel more secure and people looking for jobs actually find them. It is a bit of the chicken/egg question. Then there is the credit (or lack of) question. The Government provided a lot of liquidity to the banking industry in hopes that it would spur lending. It did not. Banks are holding too much questionable paper on their balance sheets and are hording the money as insurance in case they have to face more defaults.
To add to the fog in my crystal ball there is the question of Afghanistan. The Military knows that it will take a massive surge to win and that doing nothing will bring defeat. The President isn’t sure that he wants to support a surge for fear of burdening the country with yet another costly and protracted military conflict. The Democrats are afraid they will be unable to move the domestic agenda forward if the have to fund a broader war, the very thing they railed at G.W. Bush about. Yet if they cut and run, they will be seen as soft on National defense which could cost them dearly in the next two elections. The democrats are learning what the republicans learned over the past administration. It is far easier to criticize and lament what could/should be than to govern.
China isn’t thrilled that the administration caved into special interest pressure and passed a tariff on tires to raise the cost of imported tires. Few, if any US jobs will be saved, you and I will end up paying more for tires and our biggest creditor, the Chinese, are irritated. It also sends a bad signal to the wider market that we talk free trade but, when times get a little tough, it’s every man for himself.
So where does all that leave us? We have an inexperienced President, surrounded by bright but young and largely inexperienced advisors. We have the biggest world wide financial crisis since the 1930’s taking place in an environment of technologically enhanced communications putting more information at out fingertips than ever before. Maybe we know too much, too soon for our own good.
All in all it seems that we are in uncharted waters and that we need to be extra vigilant as we move forward. We may not be able to control the speed of events so we have work extra hard at the vigilance part.
Tuesday, September 8, 2009
Labor Day
Sep 4th
September is a usually bearish month in the stock market and the news on the economy isn’t helping turn that around.
First time unemployment claims have remained essentially unchanged for 9 weeks, running at 560,000 plus new claims each week. Actually the current 4 week average is up about 1% from the prior four weeks. The layoff announcements for the month were better than the previous month but on par with the month prior to that. Many companies are still trimming, but are doing so now at levels that don’t require disclosure.
Retail sales are holding their own but then Labor Day was quite late this year.
Sep 8th
Consumer credit numbers came out three times the most conservative estimates and double the prior month, indicating that the consumer is taking the idea of saving to heart. This does not bode well for retail sales numbers and could be in anticipation of Christmas. They may be reducing debt now so they can spend at Christmas or they may be establishing a savings pattern that will mean a bleak Christmas for retailers. It could impact on our Chinese supplier friends as well.
We can blame lots of people for the predicament we are in, there is plenty of blame to go around. But, you ask, what can we do about it? Unfortunately not a lot. We are paying the bill for the excesses of the past decade. Much like the buy now pay later philosophy that got us where we are today, the pay later has arrived. Times will be lean and money a little harder to come by for several years.
On the plus side, we will all be well served to get on a pay/go plan personally. Then we can insist that the government do the same.
Keep watching, times change rapidly.
September is a usually bearish month in the stock market and the news on the economy isn’t helping turn that around.
First time unemployment claims have remained essentially unchanged for 9 weeks, running at 560,000 plus new claims each week. Actually the current 4 week average is up about 1% from the prior four weeks. The layoff announcements for the month were better than the previous month but on par with the month prior to that. Many companies are still trimming, but are doing so now at levels that don’t require disclosure.
Retail sales are holding their own but then Labor Day was quite late this year.
Sep 8th
Consumer credit numbers came out three times the most conservative estimates and double the prior month, indicating that the consumer is taking the idea of saving to heart. This does not bode well for retail sales numbers and could be in anticipation of Christmas. They may be reducing debt now so they can spend at Christmas or they may be establishing a savings pattern that will mean a bleak Christmas for retailers. It could impact on our Chinese supplier friends as well.
We can blame lots of people for the predicament we are in, there is plenty of blame to go around. But, you ask, what can we do about it? Unfortunately not a lot. We are paying the bill for the excesses of the past decade. Much like the buy now pay later philosophy that got us where we are today, the pay later has arrived. Times will be lean and money a little harder to come by for several years.
On the plus side, we will all be well served to get on a pay/go plan personally. Then we can insist that the government do the same.
Keep watching, times change rapidly.
Wednesday, September 2, 2009
September 2, 2009
OK, so now its September, typically a down month in the market. The first day appears to be trying to live up to its historical performance. Is it a time to bailout again or is this the pull back you’ve been waiting for?
What do the economic signs say? Jeez, this is like reading tea leaves or tarot cards.
Housing is starting to stabilize. Automobile sales jumped up for the month propelled by the cash for clunkers program but is probably not sustainable. Unemployment is unlikely to show any signs of real progress. This will dampen spirits and cause the consumer to pull back even more. For me this remains a time to continue to play, defensively and keeping a sharp eye out for the opportunity for a great play.
I think the third quarter will be an anomaly showing some positive GDP growth but won’t be sustained because it was contrived or manufactured by the Cash for Clunkers program and the $8,000 first time home buyers tax credit. Absent these stimuli I think we are in for a lackluster fourth quarter. That said, I think we may see some real improvement develop slowly over the first and second quarter next year, with sustainable improvements leading to GDP growth in the 2-4% range. This will help unemployment some and will begin to change the attitude of consumers. As it builds on itself, GDP will grow at a 4-5% rate. If it begins to surpass this level the Fed will begin to remove liquidity to keep it at a sustainable rate. The unemployment rate will not likely return to the 5% level until 2012.
In the interim, housing prices will stabilize but not grow. New housing will remain at a disadvantage pricewise to re-sales. Once pricing makes new houses seem more affordable, commodities will again head skyward. New credit regulations will slow the growth of land development at least until existing lots in inventory are absorbed. My guess is 2013- 2014.
What do the economic signs say? Jeez, this is like reading tea leaves or tarot cards.
Housing is starting to stabilize. Automobile sales jumped up for the month propelled by the cash for clunkers program but is probably not sustainable. Unemployment is unlikely to show any signs of real progress. This will dampen spirits and cause the consumer to pull back even more. For me this remains a time to continue to play, defensively and keeping a sharp eye out for the opportunity for a great play.
I think the third quarter will be an anomaly showing some positive GDP growth but won’t be sustained because it was contrived or manufactured by the Cash for Clunkers program and the $8,000 first time home buyers tax credit. Absent these stimuli I think we are in for a lackluster fourth quarter. That said, I think we may see some real improvement develop slowly over the first and second quarter next year, with sustainable improvements leading to GDP growth in the 2-4% range. This will help unemployment some and will begin to change the attitude of consumers. As it builds on itself, GDP will grow at a 4-5% rate. If it begins to surpass this level the Fed will begin to remove liquidity to keep it at a sustainable rate. The unemployment rate will not likely return to the 5% level until 2012.
In the interim, housing prices will stabilize but not grow. New housing will remain at a disadvantage pricewise to re-sales. Once pricing makes new houses seem more affordable, commodities will again head skyward. New credit regulations will slow the growth of land development at least until existing lots in inventory are absorbed. My guess is 2013- 2014.
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