Posted by Michael A. Kamperman on August 24, 2010
Existing Home Sales plunged 27% in July to the lowest level since 1995. True, demand was borrowed from the future by the tax credits. But in 1995 mortgages rates were on the way up, not down. Not down to the lowest level in my adult lifetime and most likely your adult lifetime too. And let’s not forget home prices are back to early 2000 levels. Lower prices and lower interest rates cannot stimulate macro demand for housing. The reason is simple. We built enough single family homes for 70% of the population, yet only about 64% of the population is traditionally positioned for home ownership. Young people in their 20’s looking to build a career with a resume are better off mobile than tied down. People whose finances are poor don’t need the added costs of home ownership. Now, combine overbuilding market inventory with high unemployment, tight mortgage credit despite the heroic efforts of the FHA, and the deflationary psychology that prices could continue l0wer rather than higher and you have a broken market for homes.
The Obama Economic Team has failed to come up with a strategy to revive the housing market. The market has become addicted to tax credits. The mortgage modification efforts have been a woeful failure with almost half of the participants re-defaulting, and most inquirers failing to qualify. If your current on your mortgage you get no help. It is time for out-of-the-box-solutions. To change the direction of housing the Obama Administration needs a plan that addresses supply, credit, and psychology.
To rebalance supply we need to demolsish houses. We should end the cash for caulkers program and offer people who live in run down houses a chance to upgrade to a beautiful foreclosure on favorable terms. Then we should demolish the homes they left behind. If a bank is sitting on a run down foreclosure, then it should demolish it. The solution is not to talk people who shouldn’t own a home into one, that will only push more problems down the road. The solution is to lower the vacany rate and rebalance supply and demand. Credit is easy. Simply offer to refinance every current mortgage for 4% without an appraisal, a new title policy, or income verification. If their current they are getting the cash from somewhere to pay and we would be lowring their payments. Salvage the salvagable rather than trying to salvage those who simply cannot afford the house. Everyone marvels at the Chinese economy, yet over half of the apartments in Beijing and Shanghai are vacant and owned by investors who believe in real estate. In China they are building all sorts of things they don’t currently need. Psychology will return in America when we see more people bidding for homes than homes available for sale, and when their are no more foreclosures or short sales in the neighborhood dragging pricing down.
Posted by Michael A. Kamperman on June 22, 2010
Here we go again. China once again throws us a bone to pacify the barking dogs calling for reform. First China “pretended” to run a trade deficit right before the Treasury had to declare whether or not China was a currency manipulator. Predictably, Geithner took a pass. The next month China once again ran a huge trade surplus. Now China has decided to adjust its currency, the yuan, to a basket of currencies including the euro and the yen as well as the dollar. This decoupling of the dollar is nothing more than a smoke and mirrors trick. China still plans to go “slow.” In fact, Nouriel Roubini pointed out this new structure would allow China to actually weaken its currency against the dollar in the event the euro and yen were to fall significantly against the dollar. What is actually happening is having the yuan tied to the dollar has stuck China with the unintended consequence of seeing its currency rise in value against the euro, whose countries represent its largest trading partner. Despite all the talk about China being concerned about our fiscal position China never took the step to diversify away from the dollar when the dollar was weakening against other currencies. Now that it is strengthening they suddenly want diversity. And predictably, this move occurs right before the G-20 meeting next week where pressure was about to be ramped up on China to reform. Now they can wink and say they already did.
China’s policies are destabilizing the global economy to the benefit of China. Currently China purchases only one dollar worth of goods from us for every four dollars it sells us. Even Japan is only at a two to one ratio vs China’s four to one ratio. Additionally, China has horrific working conditions for little pay. The time has come for the U.S. to tell China the free ride to development is over. Not only must China begin to import more goods, but it must also begin to improve working conditions and raise workers pay. If this costs it some exports, then so be it. There is a direct link to the debt crisis in the West and China’s flooding Western market with cheap goods based on a manipulated currency on the back of all but slave labor. Workers in the West that are forced to compete are being forced to take big pay cuts. Less income reduces their ability to pay their debts.
The upcoming G-20 summit represents an opportunity for President Obama to stand up and be counted. He should not tell others simply what they want to hear. He should not concern himself with America’s likability by the rest of the world. he should tell China the jigs up and gradualism they crave is unacceptable. He should tell Europe, particularly Germany and the U.K., that austerity will solve nothing and will ultimately trap the Western World in a prolonged debt induced depression. He should stand up for Radical Keynesianism. It’s actually comical that the Great Depression of the 1930’s demonstrated Keynes was right and the Austrian Economists were wrong. So who is the world turning to during the next debt-induced Great Depression but the Austrian Economists. Finally, he should then turn the microphone to the U.S. Congress and admit the stimulus bill he championed was too small, not too big. He should lay before them another stimulus bill for 2011-2012 of more than one trillion dollars. This time he should he include massive infrastructure spending, which will improve America’s productivity. He could show real leadership. While not holding my breath, I remain hopeful.
Posted by Michael A. Kamperman on April 3, 2010
It is great news that more Americans found a job in March than lost one. That is the end of the great news. That is unless of course your a quantity-over-quality kind of guy or gal. Of the 162,000 jobs created in March, over half were temporary jobs split between the private sector and U.S. Census Bureau. The ADP report showed a loss of 24,000 private sector jobs, while the Labor Department reported a gain of 123,000 private sector jobs. Last year the Labor Department was consistenelty more optimistic than ADP. Then a couple of months ago the Labor Department revised down the number of jobs for 2009 by almost one million workers. More disturbingly average earnings declined by .1%. When coupled with the recent .1% decline in the Core CPI rate the risks of entering a deflationary spiral are rising. What has come to be known as the underemployment rate or real unemployment rate (U-6) rose to 16.9%, even though the official unemployment rate (U-3) held steady at 9.7%. The recent Gallup poll reported the underemployment rate rose to 20.3% in March, up from 19.9% in January. The difference between Gallup and the U-6 rate is probably related to questions surrounding how often you looked for work in the last 12 months and seasonal adjustments. Gallup is not anxious to find technical loopholes to exclude people from the labor force. Additionally, the number of people out of work 6 months or longer rose again and now stands at over 6 1/2 million. But the number that jumped out at me is the number of people who were forced to work part-time for economic reasons rose by 263,000 in the household survey. When the last 5 months are taken together as a whole it appears the labor force has stabilized. However, the wage declines are an indication that the quality of jobs are going down as much as it is an indication of deflation.
What appears to be happening is that as people’s unemployment benefits run out they settle for any job. It makes no sense to take a job for less than half the pay of your old job while you are collecting unemployment benefits. It makes a lot of sense to take whatever you can get when the checks stop coming in the mail and you need to find a way to put food on the table. The problem is it is not enough for our society to simply have people working. We need to have them working in good paying value added jobs. We are a society deeply in debt. As such we need rising incomes to service the debts. If incomes are declining it is much more difficult to pay our debts. If incomes are declining it is much more difficult for tax revenues to stabilize. And finally, if incomes are declining it is much more difficult to grow our economy. For despite the .1% drop in average earnings we have a long way to fall if our wages are to reach par with China where the average worker in Shanghai makes $5,000 per year. Most of these workers have no benefits, such as pensions or health care. The Chinese society also doesn’t have the percentage debts to service that the American society does.
Rather than high-fiving at the Whitehouse while strategizing with Census hiring how to have the lowest top-line unemployment number possible for the November 2010 election, the Whitehouse should take a serious look at this supposed economic miracle. President Obama should ask is the March Unemployment Report the best we can do after-all? After we spent a bunch of our $787 billion economic stimulus money? After the Federal Reserve printed over $1.5 trillion? What will happen now that the printing has ended? What will happen now that taxes will rise due to the health care bill, due to the states need for revenue, and due to the pending expiration of the so called Bush tax cuts in 2011? What will happen in 2011 when the states don’t have stimulus dollars to plug some of the shortfalls in their budgets? Where do we go from here? The President’s strategy of having the U.S. double exports within 5 years is a joke when one considers we are competing against global workers who make $5,000 per year without benefits and that have free and open access to our markets while we don’t have free and open access to theirs. The next big joke is the oppositions plan that the way to improve the economy is to reduce the federal deficit primarily through spending cuts. Why don’t we ask Latvia, Ireland and Greece how that’s working out. Our country needs to have a real long look in the economic mirror and quit spinning every economic statistic in a way to make it benefit either the Republican Party or the Democratic Party. Otherwise, like Japan we are staring at two lost decades, not one.
Posted by Michael A. Kamperman on November 28, 2009
Dubai dropped a debt bomb on unsuspecting speculators and this will set off another round of dominoes falling into each other one by one. The Islamic bonds Dubai wants relief from were trading at a 10% premium to face value and were of course were highly rated by Standard & Poor’s when Dubai said it needed more time to pay. Now those same bonds are priced at 50 cents on the dollar. Everyone apparently assumed Dubai’s oil rich neighbor Abu Dhabi would bail it out even though it had no contractual or implied arrangement to do so. Without a bail out it was obvious Dubai couldn’t pay its debts. The city-state borrowed heavily to build a beautiful city by the sea. The problem is the buildings are mostly empty and neither buyers nor renters can be found at almost any price. Property values officially fell in half before the debt bomb was dropped. As construction crashes to halt in Dubai for the foreseeable future it will further detract global GDP. And, it will decrease the demand for steel and cement and engineering firms and construction workers in an industry already massively oversupplied. Furthermore, it will tighten credit markets making it more difficult to start a new venture. If Dubai were an isolated incident all of this could be absorbed and would amount to a hiccup. But the Dubai story is both common and global.
Dubai shares it currency the dirham with the other city-states of the United Arab Emirates and doesn’t directly control the United Arab Emirates Central Bank. Hence, Dubai cannot print away its problem. Consider that the countries that share the euro have the same problem as Dubai; they cannot print away collapsing real estate bubbles. Also consider that some of the same investors in Dubai bonds that assumed Abu Dhabi would step in are some of the same investors in Irish, Spanish, Italian, and Greek bonds who are assuming some form of support will be coming from France and Germany in a pinch even though there is no contractual or implied reason to think so. Dubai’s default also raises questions about implied guarantees from various agencies of a multitude of nations when no contractual arrangement to step in exists. The Dubai debt bomb has ended a wink and a nod lending.
The longer shadow cast by Dubai’s default will not be the questions surrounding assumptions of what governments will and won’t step in to resolve a crisis not of their own making. The real shadow is unsustainable and imprudent overbuilding when there is no reason to believe demand exists for the new infrastructure. The Dubai economic miracle was a mirage just like the U.S. housing bubble fueled by AAA rated subprime mortgage-backed securities was a mirage. But the biggest economic mirage in the world soaking up huge amounts of commodities is China. Like Dubai, China has massively overbuilt its real estate markets far beyond actual demand and it keeps building. In inner-Mongolia China has built the beautiful modern city of Ordos for the one million residents of the old city of Ordos. But the new city is so expensive none of the residents can afford to live there and the city literally sits empty and no one lives in it. Non-economic projects continue to sprout all over China. All mirages eventually vanish. It is only a matter of time before China drops its own bomb on the global economy and deflation hits commodities like it is hitting real estate, consumer goods, and wages.
Posted by Michael A. Kamperman on November 10, 2009
Next Next week President Obama is scheduled to travel to Asia. He will go to China and the early word is he intends to confront Chinese leaders about their manipulation of their currency the yuan. It does not float freely against the major currencies of the world like the dollar, yen, pound, and euro. Instead the yuan is fixed to the dollar at an exchange rate that is too low and it gives China a competitive advantage in competing for exports against almost every other nation in the world. It also makes imports in China expensive thereby encouraging domestic production. President Obama and most world leaders would like to solve their economic problem of creating jobs by expanding exports to other countries. China’s cheap yuan is an obstacle to achieving this goal. If the global economic pie were expanding then China’s cheap yuan would be an annoyance. But because the pie is shrinking other nations are jealously eying China and looking for ways to either gain some of China’s export jobs or get some of the jobs they shipped to China back. Also, most nations not only want a bigger share of China’s export market, they want a bigger share of China’s domestic market. The concept of rebalancing global trade is a good thing as long as it is about having China buy a lot more from us, not sell less to us. It is a good thing as long as it is focused on expanding the global economic pie and not focused on getting a bigger share of a shrinking pie. China has had to pivot its economy to focus more on the domestic market in order to maintain its economic growth targets because global trade has shrunk by almost 20% in the last year.
President Obama risks a global trade war if his focus is on cutting China’s share of global trade rather than on having China open its markets to outside competition more quickly. The value of the yuan is not main the problem. It is merely one of the tools China uses in its strategy of shipping as much as it can in finished goods to everyone else and buying as few finshed goods as it can from everyone else. The President needs to emphasize that trade with the U.S. and other developed nations is on a quid pro quo basis. China never should have been allowed to manipulate its currency. But because China is actually the world’s second biggest economy, then any abrupt change in yuan policy could cause unintended consequences. It is best to slowly position the yuan to float over time and in the short run to focus on having China quickly open its domestic markets to world exports.
President Obama will not be able to solve the America’s economic woes simply by focusing on exports. The U.S. economy is currently around $14 trillion and global trade ex-U.S. is currently around $11 trillion. Of this amount about 40% is regionally based between neighbors, similar to our inter-state commerce. Additionally, approximately 20% of global trade is energy related. This leaves about $5 trillion worth of ocean-crossing tradable goods and services above and beyond the $1 trillion we already have. Other nation’s are not going to willingly turn their share over to us. If ocean-crossable global trade expanded by 50% and we captured 50% of the increase, it would still represent less than 10% of the U.S. economy. Never mind the question of how will the world grow 50% if the U.S. consumer is forced to sit on their wallets? What President Obama should tell China is to open up their markets or we will shut ours. Then, he should come home and work on fixing the broken credit markets and creating jobs for Americans whereby they make and sell things to the world’s number one consumer, namely other Americans.
Posted by Michael A. Kamperman on August 26, 2009
The media has hyped the recent GDP data out of France, Germany, and Japan and has declared their economies emerged out of recession in the second quarter and returned to growth. In July which is the start of the third quarter, Japan’s exports fell 1.3% from June. Exports in July fell 36.5% from year earlier levels and imports fell 40.8%. Should we really declare an export dependent economy exporting less than 2/3 of what they exported the year before as out of recession and growing? How weak is domestic demand in Japan if imports have fallen 40.8%? In July exports from Japan to the U.S. fell 39.5%. Now how is the U.S. economy on the verge of recovery if our imports from Japan are down nearly 40%? The clear answer is both Japan and the U.S. are still mired in a deflationary depression. If a V-shaped recovery is on the way, then it must have started in August because it certainly didn’t start in July.
But what really caught my eye from Japan’s report was that Japanese exports to China dropped 26.5% from a year earlier. Many economists expect China to play a major part in pulling the world out of the global economic crisis. These analysts point to China’s 7.9% growth rate in the second quarter as a sign their stimulus plan is working. I’m sorry, but an economy that is truly growing 7.9% per year does not have a 26.5% drop in imports from one of its largest trading partners. While China is not doing as badly as Japan or the U.S., in many ways the numbers out of China are more disturbing. China initiated an aggressive stimulus plan that is the largest in the world as a percentage of GDP. China’s stimulus plan has been front-end loaded, whereas the dysfunctional U.S. plan has been back-end loaded. China has also opened the lending spigot. Whereas total lending from U.S. banks has been negative the last few months, China’s banks have increased their loans by over one trillion dollars already this year. Shouldn’t China be showing growing imports based on all of the stimulus spending and lending in their economy?
China calculates their GDP data based on production and not on final demand. As long as products are produced they are counted in the GDP data even if they are simply placed in a warehouse for storage. The drop in imports is indicative of declining demand in China. Most likely China has been over-producing relative to real demand to maintain its growth rates. If this is so, then China will not need to increase production when real demand returns. If demand doesn’t return, then China has placed itself in a position whereby it will need to sharply curtail production. Perhaps the lack or internal demand in China is the reason China’s electricity consumption is down. It also explains the reason the Chinese economy is now experiencing deflation. In the Great Depression there was a sharp leg down in the economy, followed by a temporary flattening period, followed by a second sharp leg down in the economy. Another leg down in the global economy could originate with a loss of faith that China can actually pull itself out of the global deflationary depression, no less the rest of us.
Posted by Michael A. Kamperman on August 5, 2009
We are not in an economic recovery, not by a long shot. If estimates are correct the unemployment numbers for July will show somewhere between 300,000 to 450,000 job losses. That would not be a sign of slack hiring but of continued firings. Hiring is a lagging indicator once a recovery takes hold. Continued firing is a clear sign there is no recovery. Confusion about the concept of “net exports” in the GDP data is leading many to misinterpret the state of the economy as being more positive than it really is. U.S. imports and exports peaked in the third quarter of 2008, with exports reaching $1.913 trillion. In the fourth quarter of 2008 total dollar exports fell to $1.706 trillion, followed by a drop to $1.509 trillion in the first quarter of 2009 and a drop to $1.483 trillion in the second quarter of 2009. Yes, the rate of decline is slowing. But the GDP data claims “net exports” added .45% to GDP in the fourth quarter of 2008, added 2.64% positive growth in the first quarter of 2009, and finally added 1.38% to positive GDP growth in the second quarter of 2009. Our actual exports have fallen by over 20% in the last three quarters and yet our GDP calculation claims “net exports” have added 4.5% to our economic growth. The firing data offers a clearer picture of the true state of the economy. Firing is not a lagging or leading indicator, it is a current indicator. If the July unemployment report estimates are accurate, then the economy was still falling and not in a state of recovery in the month of July. Yet July is part of the third quarter when the average forecast of economists is calling for positive GDP growth.
Many look to China as a source of economic strength and positioned to lead a global economic recovery. The latest data out of South Korea says otherwise. According to Bloomberg news, “exports to China, South Korea’s biggest overseas market, fell 15.7 percent from a year earlier in the first 20 days of July. Exports to the U.S. slid 26.5 percent in the period while shipments to Japan fell 32.6 percent, today’s report showed.” China claims a 7.9% second quarter growth rate and yet, just like the U.S. and Japan whose economies are in an acknowledged deep slump, China is importing much less than it did last year.
The economic strategy being employed by the White House is being driven more by the political advisers than the economic advisers. Today the President and his Administration began making a concerted effort to convince Americans the economy is doing better than expected, and the stimulus plan is working as intended. Considering the stimulus plan was supposed to keep unemployment around 8% in 2009 and it will soon reach 10%, just what is the objective of this plan of denial and obfuscation? The objective is to paint the picture the President has a solid plan for the economy. No, he doesn’t. What the President needs to do is say the economy is in much worse shape than expected and that is unacceptable. He should say the stimulus plan, while helpful, is proving to be not nearly effective enough in stopping the economy from declining. He should say he is willing to stake his Presidency on restoring jobs in America and will do whatever it takes to make that happen. President Obama, I will tell you what your political advisers should have already told you, your Presidency is already staked to the unemployment rate.
Posted by Michael A. Kamperman on July 24, 2009
For those thinking that the U.S. can ride the coat-tails of the global economy to recovery, think again. GDP in the U.K. fell by a worse than expected .8% in the second quarter. This dismal performance included the benefits of stimulus spending, .5% central bank interest rates, bank rescues, and quantitative easing. In Spain, unemployment for the second quarter reached 17.9%. Many Spanish construction workers are on a temporary status and are thus easier to lay-off than other workers in other parts of Europe. Admittedly, those championing growth prospects in the rest of the world often refer to the emerging economic BRIC countries, especially China. Well, in the first half of this year consumer price inflation fell 1.1% from the previous year. This in spite of significant stimulus spending on public projects by the Chinese government and the government and the government’s insistence that state own banks ramp up lending. The state owned banks supposedly doubled the lending rate from the year before. While these actions created a second quarter growth rate in China of 7.9%, it is strange that China is experiencing deflation. The rampant growth rates in China over the last several years have been accompanied by high single digit rates of inflation. In fact, inflation had been a key concern for the Chinese government up until now. To me, Chinese deflation is signaling a weakening Chinese consumer and a weakening Chinese private sector economy.
The Obama economic dream team needs to figure out how to generate internal demand, rather than chase after some pipe-dream of export led growth. And the Federal Reserve needs to up its program of quantitative easing and print more money before deflationary forces take hold in the global psyche. Once the desire to save replaces the desire to spend it could take a generation or two to reverse the psychic fabric of society. The economic paradox we face is that while spending too much got us into our economic mess, it only by spending even more that we can get out of it. Otherwise, the debts that are weighing down the economy will become even more difficult to deal with as global GDP shrinks and deflation decreases the value of assets and earnings.
Posted by Michael A. Kamperman on June 8, 2009
The yield on the 10-year Treasury continues to rise and now the yield on the 2-year Treasury is rising sharply as well. There are multiple factors contributing to the upward move including fears of renewed inflation, a large amount of supply coming into a deleveraging world, a seeming lack of fiscal discipline in Washington, and uncertainty about the Fed’s commitment to aggressive quantitative easing. However, comments coming out of China are also pressuring rates higher. China has expressed concern about the “safety” of its large investments in U.S. government backed bonds. China has talked about replacing the dollar as the reserve currency of the world with a basket of currencies, including the Chinese yuan. Finally, China has warned the U.S. not to aggressively print money. The word on the Street is China is moving its continuing purchases of U.S. Treasuries to the shorter end of the curve.
However, China is the world’s largest currency manipulator and is in no position to lecture the U.S. The Chinese economy is the second largest economy in the world, and yet the yuan does not trade freely against other currencies. China sells the U.S. over $4 worth of goods and services for every $1 they buy. It seems China wants its cake and it wants to eat it too. China wants to maintain the status quo and keep things as they have been for the last few years. This is because U.S. policy has been very good for China. China fears a change in policy. China doesn’t want to see the yuan strengthen significantly and their trade advantage dissipate. Hence, China is using its position as our largest creditor to pressure our leaders in Washington. Unfortunately, some statements made by Treasury Secretary Geithner after his recent trip to China indicate China is being heard and heeded in Washington.
Why? The U.S. economy would benefit from a more aggressive policy of quantitative easing. If the dollar falls as a consequence of that action then so be it. U.S. goods would become more competitive on the world stage and it would become cheaper to manufacture goods in the U.S. rather than abroad. It is possible the leaders in China do not grasp the seriousness of the deflationary depression that is sweeping the world. It is obvious German Chancellor Angela Merkel doesn’t get it. For the two largest net exporters to dream of a return of the good times is understandable, but not realistic. Rather than listening in China, perhaps Treasury Secretary Geithner would have been better off lecturing. Of course, with the collapse of his troubled asset purchase program that was to be levered with taxpayer dollars, one is left at times to wonder if Treasury Secretary Geithner gets it.
