A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.

About Me

Age: 26 Occupation: Private Equity

Wednesday, May 30, 2007

S&P breaks "record," closes at 1530

Thought of the day: Adjusted for inflation, the S&P 500 would need to pass 1878 to actually break a record. We still have 21% to go before we get to that level.

Thursday, May 24, 2007

New Home Prices Fall 11%

Sorry for the prolonged period of inactivity. I won't be able to get back on a good posting schedule for a couple of weeks. Lots of family issues and work have been making it too difficult to find time to post.

I'll have to be short.... I am extremely encouraged by the drop in home prices. It looks like market forces are finally starting to work... as this has (GASP!) led to MORE SALES! Gee, that complicated economics stuff actually works! Who would have thought lowering your price will get people to buy your house? I guess more people are learning that life's too short to have your house own you for 30 years.

This also means, because new homes are selling for less, existing homeowners will have to cut their prices to keep up... unless they don't want their houses to sell. I might actually be able to afford a house before I'm 45!

Even more encouraging is that incentives (like free kitchens, cars and cash back), which can total more than $20,000, have not been subtracted from the new median price... That means new homes are really going for $210 - $215k right now.


On a somber note, one of the sweetest women I've ever known passed away suddenly last week after falling ill on mother's day. She always treated me far better than I deserved. I thought I was special, but the enormous turnout to her funeral was testament to the fact that she treated everyone that way. I loved her dearly and she'll be sorely missed.

Friday, May 11, 2007

"The Worst is Over".... Yeah Right

Check out the rather humorous Wall Street Journal Article below my diatribe...

It looks like many of these economists went to the same school as David Lereah. We have gone from "The economy is strong... The housing issue is contained as consumers continue to spend" to the "the worst has passed" in only one quarter. Economic cycles take much longer than that. I suggest they start paying attention to Nouriel Roubini. Of course, it's too late and the train wreck has begun.

I think the debt-laden consumer is starting to feel like the guy in the picture running from a tsunami. Unfortunately, since he's the average guy, he doesn't have the "high ground" of savings to run to.

Here are my reasons why it's going to get worse before it gets better:

1. False Expansion: The recent economic expansion was not precipitated by a growth in productivity or incomes. Instead, the economy was dragged out of a slump by spending through a massive increase in consumer debt. That debt has to be repaid, and the average consumer's income hasn't grown by an amount necessary to compensate for this. Takeaway: The consumer now has to restrain spending in order to pay for past consumption. We simply traded in future consumption to pay for current consumption, with interest.

2. Misallocation of Capital: Why hasn't the consumer's income grown enough? That one's easy. We borrowed massive amounts to pay for a capital good, housing, which has no payoff in productivity. In Econ 101 - Higher Productivity = Higher REAL incomes (meaning income growth greater than inflation... so you are REALLY earning more). A lot of that money should have been spent on infrastructure and technology that would have helped us become more productive and thus earn more. Typically, borrowing is not a good investment if the cost (interest) exceeds the benefit of using those proceeds. Takeaway: Our incomes haven't grown because we flushed away trillions of dollars on assets that don't help boost our incomes. We now have to pay that money back with interest.

3. Negative Savings Rate: Notwithstanding the fact that we are borrowing a lot more, we are borrowing to consume more than we earn. That hasn't happened since the two years before the great depression. Too many of us are relying on paper gains and asset bubbles to support ourselves. Unfortunately, asset bubbles don't make the economy as a whole richer (only producing more goods and services per person does). Low savings rates mean that the average person has much less of an ability to withstand an economic downturn... especially if he has high monthly debt payments to worry about. When the asset bubble deflates, and we haven't saved, we are no better off than when we started.

Negative savings rates are bad for long-term economic growth as well. Using savings instead of debt to pay for investment that improves our lives means that we get all the benefits without having to pay interest. Productivity rises, we earn more, and we get to keep it all. Takeaway: We have severely hindered our long-term ability to earn more by failing to save.

4. The Big One - Consumer Running Out of Credit: Following up on the negative savings rate, a consumer can live above his means as long as there is someone to supply the credit (See: U.S. Government). Consumer debt is already at record highs, and many consumers have little room left to borrow. Mortgage equity withdrawals accounted for a significant portion of economic growth recently (their use has perhaps increased tenfold over the year 2000). Our economic growth has become dependent on consumers continuing to spend at the rate they have been (i.e. spending more than they earn)... which can't be sustained.

The consumer will have to cut back on consumption, soon (he is already beginning... check the retail sales data). When that reality takes hold, the economy will dip into recession... consumers will default on their loans in record numbers (commensurate with the record amounts of debt) and we will be faced with a significant financial crisis. Takeaway: We're screwed.

Nope, the worst is yet to come....

Economy Is Clawing Back, but Not Much

Economists See Signs of a Rebound in Growth,
But 2007 Is Still on Track as Weakest in Years
May 10, 2007

The worst of the economic slowdown has passed, private economists said in the latest WSJ.com forecasting survey. But they don't see any reason to expect a significant acceleration.

By a more than 5-to-1 margin, the economists said they believe the first quarter's 1.3% growth -- the weakest in four years -- marked the low point in the slowdown that gripped the economy much of last year. However, they expect growth to stay below 3% into early 2008, leaving 2007 on track to have the slowest economic growth since 2002.

[Full Results]
See and download forecasts for growth, inflation, interest rates and more. Plus, items on the dollar, the alternative minimum tax and the outlook for a new high in Nasdaq stocks. Survey conducted May 4-8.
Washington Wire: Economists See No AMT Overhaul

The economists don't see any new engines for growth this year. They expect continued weakness in consumer spending, for instance, which accounts for 70% of the economy.

"All of expected growth is addition by subtraction of drags," said Bruce Kasman of J.P. Morgan Chase & Co. "Drags from housing and inventories of manufacturing are fading," he said. Business spending may pick up a bit from its recent lull, said Allen Sinai, of Decision Economics.

On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.

Mickey Levy of Bank of America said he expects home construction to provide a slight boost to the economy by late in the year, after dragging down growth the past six quarters. But economists don't expect a big housing rebound. They predict home prices will fall more than 1% this year, as measured by an index calculated by the government's Office of Federal Housing Enterprise Oversight.

Inflation risks continue to loom, a concern that was reinforced yesterday by the Federal Reserve, when it voted to leave interest rates unchanged and cited inflation as its primary policy concern. Amid the inflation threat, the Fed is reluctant to cut rates, something that could boost the economy. And with energy prices high, particularly for gasoline, consumer spending is crimped.

The Wall Street Journal surveys a group of 60 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the monthly survey for May. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

Economists, on average, increased their estimates for consumer price growth from the previous survey, seeing 2.4% growth this month and 2.8% in November. When asked in April, the economists had forecast 2.1% and 2.7%, respectively, for the periods.

When asked which presents the bigger risk of triggering a spillover of inflation pressures in the overall economy, 67% of respondents chose energy prices, while 33% said food prices. While some economists said that the spillover risks remain small, Mr. Sinai expressed concerns about their affect on wages.

Last year, inflation appeared to shrug off a spike in energy prices, but Mr. Sinai said that was earlier in the inflation process. "When workers bargain, they don't bargain on core [consumer prices, which exclude food and energy]," he said. "Does anyone really think gas prices are going to go down much?"

Of course, the biggest risk to growth remains the unknown. "The economy is more levered here. Something is going to give, either on the upside or the downside," Mr. Kasman said. "I'll be surprised if we just chug along."

Among other findings of the survey:

More than three-quarters of economists said that a widening income gap in the U.S. -- where a growing share of income is going to the top 1% of households -- is a worrisome development. But the majority said the government shouldn't seek to restrain it.

When asked if the Fed is currently behind the curve, just right or too tight in light of its goal of price stability, 75% said it is just right. Just a few economists see the Fed changing rates at its June meeting, but 35 expect a change by the end of the year: 26 see a cut and nine forecast an increase.

While the Dow Jones Industrial Average continues to set records, economists don't see the Nasdaq Composite breaking its high -- which is nearly twice its current level and was set in 2000 -- any time soon. Nine out of 10 said they don't expect a Nasdaq record until 2010 or later.

Almost three-quarters of the economists expect the dollar to fall further this year, and, on average, they expect a 3.42% decline.

Write to Phil Izzo at philip.izzo@wsj.com

Wednesday, May 9, 2007

Housing Analyst: "Our Contacts Have Officially Declared the Spring Selling Season a Bust"

All, sorry for the lack of posting... My REAL job has been demanding very long hours lately... I've got something good in store for you very soon. For now, check out this article from the Wall Street Journal....

May 9, 2007; Page D3

The supply of houses and condominiums available for sale continues to grow quickly in much of the U.S., reflecting weak sales.

The number of homes listed for sale in 18 major metropolitan areas at the end of April was up 7% from March, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condos and town houses on local multiple-listing services.


The increase was above the seasonal norm. Over the past 22 years, home inventories nationwide have increased an average of 4.5% in April from March, according to Credit Suisse Group. Spring is the busiest time of year for home shopping, as families with children try to get settled ahead of the next school year.

Some of the biggest increases last month were in the metro areas of San Francisco, up about 19%; Washington, 17%; Orange County, Calif., 15%; and Seattle, 14%. Inventories declined nearly 1% in the Los Angeles area, according to Zip.

In a report issued yesterday, Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse, said her building-industry contacts have been surprised by the weakness of sales recently, "given the typical seasonal bounce that occurs at this time of year." She added, "Our contacts have officially declared the spring selling season a bust." Many people who had expected a recovery by year end "now believe the market rebound will be pushed out until 2008 at the earliest," Ms. Zelman wrote.

After booming in the first half of this decade, the housing market began cooling in much of the country in 2005. Since then, prices have been flat to declining in many areas. In recent months, an abrupt tightening of lending standards has further sapped the market by preventing some potential buyers from getting loans.

The National Association of Realtors yesterday again lowered its forecast, predicting that sales of previously occupied homes will total 6.29 million, down 2.9% from 2006. A month ago, the trade group projected that sales this year would slip 2.2%. Lawrence Yun, a senior economist for the Realtors, said many speculators have fled the market.

"It's good that we're getting beyond the tendency of some buyers to view housing as a temporary asset to accumulate short-term wealth, which is not to be expected in a normal market," he wrote.

Write to James R. Hagerty at bob.hagerty@wsj.com