More Ebb, Then Flow

As October passes into November and November slips into December we get more and more economic data and a better and better sense of public opinion. There seems to be a growing disconnect between the numbers, official pronouncements and public sentiment. This week we will try to take a look at why that might be and where it seems to be leading us. In order to do that with any modicum of competence we will need to review the recent economic news and official pronouncements.

The Recent Economic News

The general pattern in asset markets has been one of bad news, followed by rapid sell-offs and then a return to increasingly guarded optimism. Each new round of reported or forecast trouble adds toward critical mass and produces an eventual broad decline in asset prices. Fairly quickly, the dust settles and nervous and skittish money begins to re-enter the fray. Everyone waits for major earnings news from leading firms and government reports and pronouncements -- as always. Government news is far better than private sector news -- by and large. The housing sector and banks are in real trouble. The dollar is in real trouble. The GDP is growing fast and reported inflation is very, very low. In fact the GDP and income numbers are good because reported inflation is so low. Fed, Treasury and administration officials jawbone the good news and their great numbers. GDP, Personal Income, trade balances and productivity are turning in really good performances. This is based in part on the fact that many numbers are measured against low core inflation data that is being reported. Leading financial firms, housing and retail sectors are reporting poor numbers and signaling a near term future worse than the troubled present. It might be worthy to note that housing and housing -elated industries account for between 15-20% of the US economy and that 50% of the net worth of 50% of American families is compromised by ownership in the family home. Every few days we learn of more trouble. It is clear that the housing outlook will be horrible -- yes I said horrible -- through 2008. This story is and will continue to develop over the next 12-18months.

Trouble in the housing sector is now huge and growing. The below excerpt from the third quarter statement by Freddie Mac -- an agency that owns $1.5 trillion in US home mortgages -- seems important.

Credit-related expenses, consisting of provision for credit losses and real estate owned (REO) operations expense, were $1.2 billion for the third quarter of 2007, compared to $112 million for the third quarter of 2006. This increase reflects observed credit deterioration, particularly on 2006 and 2007 mortgage loan originations that have exhibited higher transition rates from delinquency to foreclosure, and higher expected severities of losses on a per-property basis resulting from slower home price appreciation and higher UPBs on those loans generating losses. Freddie Mac Third Quarter Financial Statement Press Release

In translation, the value of the home loans we own has declined at 10 times the rate it did this time last year. The value of our assets is melting down and we may have to sell some loans and will be buying fewer loans. Thus, our mission to support the mortgage market may be forced to run in reverse. We may sell into weak, over-supplied markets and buy less to stay within federally mandated credit guidelines.

Other areas of the economy will not emerge unaffected. Credit card and auto loan delinquency rates are rising. Moody's Investor Services reported the third consecutive quarter of increasing credit card delinquency rates on Monday 19 November 2007. The Financial Times of 20 November 2007 reports growing concern over rising rates of auto loan delinquency. You will be happy to learn that many credit card and auto loans are packaged and sold as asset backed securities (ABS) a la the fool proof method employed by mortgage lenders. Credit card asset backed security volume nearly doubled to over $15 billion in October 2007. I wonder where we will be shocked to see trouble developing over the next few months?

Pulled in Two Directions

Perhaps the most obvious disconnect between markets and the government is occurring around the chance of a Federal Reserve Rate Cut at the last meeting of 2007, 11 December. Bond prices and interest rates vary inversely. The more you have to pay for the stream of fixed income payments that bond ownership provides, the lower the interest rate. If markets expect a rate cut, they buy bonds pushing up the bond price and down the yield-think of a seesaw. The next scheduled Fed meeting -- after 11 December 2007 -- will not take place until the end of January 2008. Markets have adjusted the price of Treasury Bonds to reflect the likelihood of a coming Fed rate cut. The dollar has been pushed to fresh lows against the British Pound and the Euro as money leaves the US in advance of the expected rate cut. Markets expect the rate cut as economic news continues to signal recessionary conditions. The extent and breadth of trouble suggests Fed help. Optimists look to the good government figures and the strength of the rest of the world. Markets see bad news and expect help in the form of more and cheaper money from the Fed. The world sees this and sells dollars. Bond markets see this and bid up the bond prices and down the interest rates-seesaw. The December 11 cut may not happen as the Fed sees and reports positive data.

A de-coupling theory has gained many fans. It reminds me of the no-debt problem and housing bubble theory that was so popular 2004-2006. It goes like this: the world, excluding the US, is so strong that it will boom despite our soft patch and help pull the US out of any trouble. History suggests that when the largest national economy in the world and the globe's consumption machine sneezes, others catch colds -- or worse. Thus far, this has proven remarkably false. We are supposed to believe that the world has changed and no longer needs strong growth from the US. It is worthy of note that The EU and Japan appear to be slowing as well. We are left to believe that the strength of the fast growing, robust and still much smaller, rest of world category will pull the world's weight. You can add me to the list of folks who are interested in seeing this happened and impressed with how long it has already gone on. Go ahead and leave me off the roster of believers. I agree the word is changing and is ever less US-centric. I believe this is a long term process that will continue. I do not believe recent runs in global growth can be sustained with serious US weakness and sluggish European and Japanese conditions. It might be worth mentioning that the US, European Union and Japan accounted for approximately 60% of world GDP in 2006.

Where Does This Leave Us?

The public and market participants run the range from nervous to pessimistic in many quarters. Officialdom seems frightened but announces good numbers. Meanwhile, the dollar slides, oil rises and we wait for the next shoe to drop. I think it is going to get worse before it gets better. I believe that is true for areas of recent strength like, the emerging markets or developing world, tech companies, consumer companies in the US. Sadly, I am afraid that middle class America is in for a long cold winter. Recent Federal Reserve reductions in economic growth and forecasts of rising unemployment look like best case scenarios. I hope they are correct. It remains possible but, has grown less likely as more and more comes to light.

Comments

[theeconomicfractalist]

Saturation Curve Fractal Analysis - A Real Science?

In order to qualify as a true science, the subject entity must be testable by scientific method and have underlying laws that operate in the real physical environment. These laws must be repetitively provable and have reasonable predictability for different applications. Scientific testing in college biology, chemistry, and physics laboratories usually results in experimental values that roughly support the underlying mathematical equations and theoretical constructs. If indeed complex economic systems travel by the simple quantum laws that observational fractal analysis suggests, a similar validity should be testable and provable, retrospectively and prospectively, in the great laboratory of readily obtainable asset valuation saturation curves."
The Wilshire 11 October 2007 and 19 July 2007 highs were predicted by quantum fractal analysis.

[Sundialsvc4]

You omitted one "well," bloddoc. And that well is the ultimate kool-aid of our bankrupt banking industry:

Usury.

The "legalized" usury that has plastered our streets with pawn shops, title-pawn, payday advance and other sleaze-balls charging 9,000% (there is no typo here, that's "nine thousand percent") interest and more.

The "magic service fees and charges" that miraculously appear on your checking account and credit-account statements.

The industry that will, yes indeed, throw tens of thousands of people out of their homes with no thought as to what they intend to do with those homes, much less with those people.

The industry that drenches its Congressional regulators with some of the most lavish bribe-campaigns of any influence-seeker outside of the defense contractors... and has thereby bought whatever laws it wanted and whatever look-the-other-way it wished. All for ... this.

It's D-E-P-R-E-S-S-I-O-N time, folks. I just hope you did buy gold.

And the people who certainly helped to bring it about are the lenders who today charge very-considerably more than the mob ever thought of doing. It is not any exaggeration to say that many consumers find themselves paying (when the true effect of "fees" are figured in) well more than fifty-percent interest on their money.

[January]

The markets' decline is a sign of sanity. Propping up investments to ensure credit has gotten too crazy. If I skin my knee when I fall, I walk more carefully thereafter. Yes, our cyclical economy is headed for a trough. Big deal. It has happened before and will happen again.

Stop distracting us from the fact that we elected a first-rate a**hole big-oil barron to lead us, and Congress and investors happily followed him over the cliff. How else have wars ever gotten started throughout history?

[mamacat]

I think we can analyse the big problems in broad, simple terms that even an economist could understand.
The GOP administration has resulted in the use of deficit spending to fund an unproductive (not to mention immoral and stupid) war, massive tax cuts for the rich and the powerful, and a reduction in services for the public (think Katrina "relief" and lack of infrastructure and education support).
When we had a Democratic administration, we had a balanced budget, a much stronger dollar, the world was not afraid of unstable leadership in the White House, and the people trusted that their government was trying to work for them.
It really is that simple.

[themodernleader]

Halsey, you are a smart guy, insightful and prescient. We need you in politics.

[mmckinl]

Who got us into this mess ?

A brief history of the Federal Reserve ... and some questions.

Few people are actually aware that the Fed is privately owned and operated, though it gets a Congressional nod on certain posts. Few people are aware that the Fed, through its charter, creates the fractional banking system enabling member banks to loan money ten times their reserves, which can only be called steep leveraging.

The Fed has been in business for over seventy years and botched the economy many times now. In 1919 and 1929 it caused severe problems by contracting the money supply. Of course 1929 was especially severe. Many people put the blame on trade restrictions, but that simply wasn't the cause, it was the Fed. After WWII there were several instances of the Fed blundering us into minor recessions. Then in the '70s the Fed, through a loose money policy, gave us a decade of run-away inflation.

Follow the Greenspan years. Bubble after bubble, scandal after scandal, crisis after crisis. Market Crash '87, S&L '88, Bond Bubble '91, LTCM '98, the Asian Meltdown '99, the Market Crash '01, and countless scandals. Now, the Sub-Prime Crisis that is spreading through both the financial and consumer sectors due to an irresponsible policy of cheap money from '03 to '07.

The privately owned, owners unknown, Federal Reserve Bank needs to be held to account. With seventy years of dubious achievement one must ask: Why can't we create a public institution to control our money supply? Why can't we print our own money? Can we do worse than this Greenspan cycle of crises?

Questions from a liberal.

[OregonJay]

I think we should be careful about blaming the Fed, which is just an institution that is run by people. The people running the Fed are appointed by the government and by bankers. The government has been run by pro-corporate, pro-finance, conservative regimes for the past 30 years, and the result has been fiscal and monetary policies that have slammed the middle class. The government, bankers and corporations are just exploiting their position for gain in the face of a public that does not put up any serious opposition. For a variety of reasons, the left in this country was destroyed in the 1940s and 1950s, and what emerged in the 1960s, for the many progressive ideas and policies they brought, did not challenge the economic system that today is doing what it was designed to do, which is perpetuate and increase inequality. Until the people organize, mobilize and demand economic justice, which means redistributing wealth downward, those in power will continue to do what they were trained and paid to do.

[Halsey]

Max..you seem like a very smart guy...but here's the rub..I may not have an MBA or a Ph.D in economics..but I've been a (sorry folks) stock broker since 1983... back then..every Thursday...we waited for the numbers on M-1 and M-2 (the money supply)...THEN the market would go kookoo wampus..over fucking numbers...

today...I am trying to keep my dropped jaw closed..I am AMAZED at the audacity, hubris, greed of young, bright Wharton MBA's who concocted this strange...alpha enhanced, mortage hybrids..which are nothing more than the magic beans. There's no "there..there"...
yet people..nay..nations..bought into the promise of higher yields in a low interest environment.. for me..I sold not one dollar worth of investable dollars in this modern-day snake oil..I'm not brilliant..but have a bad case of common sense.

And yet..the band plays on..billions of losses..yet the CEO's of Merrill (both old and new) Bear Stearns, Lehman, Credit Suisse...continue to rake in the dough..in spite of being a HUGE part of taking this country ..and the world..down with their "quantitative" shenanigans..

W told america to shop after 9/11..like that was the patriot thing to do... in the 30's..FDR told American's to sacrifice..and we entered an era of hereto unseen prosperity (yup..raised taxes on the uber rich)....

and today..Americans want to blame everyone but themselves..well..wake up..there's plenty of blame to go around...yes..Wall Street wunderkinds...but also the American consumer..
I just heard a woman lament, in TV, that she can't get her kids the usual TEN presents..
TEN? they have to settle for three..

I posit this...you've only lost money, when your principle is invaded...if you doubled your "investment"..and have sense lost 30% of the "profits"...you've not LOST money..you have have lower PROFITS...get over it...quit spending the excess... and if you can't pay cash for it...don't friggin buy it..
()

[zizyphus]

Who really thinks any of the government figures reflect the reality we live in? The core inflation data does not include food or gas, the two things that will keep going up.

It is way past time to get rid of the Federal Reserve Bank, a cabal of international bankers who charge us for printing our money. We can print our own money, which should be backed up by gold and silver.

Our country should wake up to the fact that we aren't really producing much anymore since manufacturing jobs have been sent to lands where labor is unorganized.

The solution is simple: marijuana must be legalized, and people allowed to cultivate and market it, just as winemakers do. The prohibition against pot, like it's predecessor against alcohol, has created only more gangsterism, and was doomed from the start.

The final irony is that the government agencies charged with fighting the "War on Drugs", have been corrupted and now are competing with the other drug cartels.

It is a 15 billion dollar a year industry now. Imagine if there was a sales tax on it, to fund alternative energy research. The search for new, ecologically sane energy sources should be the thing that the bulk of our money goes to, rather than the war for oil, and the bogus war on drugs.

[mmckinl]

The party is over . The only question now is who pays to clean up the mess and that looks like us , with the dollar depreciating , house prices plummeting , a stock market meltdown and wages falling with inflation the average Joe is screwed.

Paulson said today 2008 will be worse than 2007 for foreclosures.

Given the faillures of the Fed over the last 40 years it may be time to eliiminate the private Federal Reserve and implement a public National Bank that doesn't employ fractional (leveraged) banking .

Take a look at the "Money Masters" , a look at the Federal Reserve and how we can successfully transfer the power of the Fed to a new bank.

http://www.themoneymasters.com/mra.htm

[themodernleader]

The large hunk of taxpayers money the Feds have shared freely with the Wall Street barons has not slowed deteriorating markets or consumer confidence. Any other assessment than a financial, economic decline that will stagger the world's economies for a long time, would be delusional.
However, a state of delusion has possessed the Markets for such a long time that when the laws of economics finally subsume outrageous fortune, the shock reverberates through the entire world. After the shock, starving, unemployed millions will encourage the rise of demogogues and charlatans. Many angry fingers will be pointing towards Wall Street and the American Republic. This Country better perpare for self sufficiency and a lonely road ahead with more detractors than friends.

[BRUMALIA]

Dollar slides and oil prices rise!Sounds like a song.Future is scary.Neo-cons have messed up America.

[wiseferret]

Where do you get that inflation is low??? What dark hole has that been pulled out of? Because that is NOT the reality. Cost of gas, cost of heating, cost of FOOD is UP. UP much faster than most of our paychecks. That is not low inflation. If that's not being factored into inflation numbers, than you have bogus data.

[blooddoc]

The two wells that Americans are used to drinking from - easy credit and cheap energy - are drying up. Looks like we all better prepare for a long slog through the desert with no guarantee of finding watering holes like we've had before.