“The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions – that is, of policy effects still ‘in the pipeline’.”   
-Ben Bernanke’s July 19 semi-annual monetary policy report to Congress

>

The quote above comes from Paul McCulley’s commentary for August. In it, he hits upon similar notes we made yesterday regarding Mortgage apps, housing and consumer spending. As mortgage rates increase and housing slows, we can expect the impact on consumers to be significant:

Housing_cons_sp

>

The uptake of both the quoted paragraph and the chart above is fairly obvious: Hosuing is already rolling over, and will likely take consumer spending with it. Consider also there is at least 6 months to a year worth of rate hikes whose impact have not yet been fully felt in the economy.

Hence, why Pimco thinks the Fed is done, why the Center for Economic and Policy Research believes the Housing slow down will have wider repercussions, and why NYU’s Nouriel Roubini believes a recession is most likely unavoidable.

 

~~~

 

The August 8th Fed meeting approaches during what may very well be the turning point in the economy. Corporate profits have been strong, but guidance has been soft; Good numbers do not get rewarded, but bads numbers get punished. Real Estate’s impact on the rest of the economy is impossible to ignore. Defensive sectors in the market — Utilities, Consumer Staples, Insurance, Health Care — are all doing better than the (speculative) alternatives.

With Housing on the wane, I simply do not see evidence that anything else — CapEx spending? Commercial Real Estate? — will step into its place.

Hence, we go back to McCulley: "Central banking is the art and science of decision-making under uncertainty." As the recent data makes clear, we have uncertainty in spades these
days: The economy is slowing, while at the same time inflation
seems to be accelerating at the core. 

If not the long sought after pause, at the very least we should expect to hear very different noise from the Fed come August 8th:  Either they stop, or they announce their intention to do so.

 

Sources:
Don’t Shoot Ben and Don’t Short Bonds
Global Central Bank Focus
Paul McCulley and Andrew Balls | August 2006
http://www.pimco.com/LeftNav/Late+Breaking+Commentary
/FF/2006/FF+July+2006.htm

Weakening Housing Market Slows Economy
Dean Baker
CEPR, July 28, 2006
http://www.cepr.net/bytes/gdp_byte_2006_07.htm

Why a Fed Pause or Even An Easing Will Not Prevent the Coming U.S. Recession
Nouriel Roubini
RGE,  Jul 31, 2006
http://www.rgemonitor.com/blog/roubini/138792/

Category: Consumer Spending, Economy, Federal Reserve, Fixed Income/Interest Rates, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Tension Between Incoming Data and Forecast”

  1. Craig H says:

    The BOE had a big surprise for traders in England who discounted the inflation threat and their own housing bubble.

    Is there a surprise in store for us on Tuesday?

  2. Mark says:

    If this inflation is cyclical then the models are correct that it should abate as economy slows. If it is STRUCTURAL as many economists now posit, then it is going to be a big surprise to the markets as it persists.

  3. ss says:

    “The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions – that is, of policy effects still ‘in the pipeline’.”

    -Ben Bernanke’s July 19 semi-annual monetary policy report to Congress

    Gee Barry…perhaps we should discuss LEADING economic indicators TRENDS that might actually be taking the pulse of these “effects still in the pipeline”.

    What are these leading indicators telling us?

    - NO recession (but a risk if rates go higher)
    - Inflation clearly coming down

    Thoughts please?????

  4. Chief Tomahawk says:

    We’ll get visibility soon as to whether or not Bernanke is Mr. Inflation Fighter.

    Thanks for breaking out the housing/spending graph BR. That’s one of the best!

  5. ss says:

    Chief…thanks…you’re right. That graph points out yet another similarity to the ’94-’95 “recession near miss, then melt up.

    Homebuilders trading at book value. Hmmmm.

  6. Insurance Guy says:

    SS,

    What are you lookking at? Just slowing growth?

  7. ss says:

    In Barry’s chart, I see a huge drop in housing…with spending lagging (just like in ’95-’95). IF the Fed gets religion and takes its foot off the emergency break, the conumer will not fall off a clif…just like in late ’94 (we avoided a recession). The Fed will be cutting rates early next year (or so says the bond market). It’s right there to see.

    So yes…we have slowing growth, and slowing inflation…and the much hated (on this site) soft landing. (Note I avoided the fairy tale moniker).

    :o)

  8. S says:

    SS:

    I’ve done a fair amount of work on the homebuilders. Consider BZH, whose fiscal year ends Sept 30.

    If you haircut estimates for fiscal year ’06 ending next month to 75% of the consensus AND if you cut next year’s estimates in HALF, BZH still trades at less than 0.90x projected ’07 book value.

    I think that valuation will attract the deep value guys while interest rates and unemployment both have sub 5% handles.

    I closed my eyes and held my nose and bought some on Tuesday.

  9. j d ess says:

    ss, i’m glad you are here. even though i think you’re wrong, i appreciate your posts…

    In Barry’s chart, [you] see a huge drop in housing and assume that it’s 1993-94 again (drop in housing, no recession).

    but what you actually see a huge drop in NAHB index, which is different from housing in general. to read that chart you would believe that the housing market in ’94 and ’98 were as or more rockin’ than the past 4 years. obviously, this is not the case.

    if i understand correctly (and someone please correct me if i am wrong) nahb members overbuilt in those years and were taken to the cleaners in the aftermath. those drops represent a specific industry that got wallopped, not “housing” in general. consumer spending didn’t slow because consumers (home owners) weren’t nailed as hard.

    again, someone with better historical perspective on this please step in if i am wrong.

  10. diva says:

    I think everyone should ponder this chart – which Alaskan Pete provided a few days ago:

    http://stockcharts.com/c-sc/sc?s=$USB&p=M&st=1980-05-14&i=p28195858237&a=79982467&r=935

  11. ss says:

    JD..you bring up an interesting point/question. I manage money, not houses.

    One of my lingering questions or bones to pick with the housing bubble heads is this — what % of the huge inventory out there is “I HAVE to sell…at ANY price vs the “I’d like to sell…at MY price”? Unless a HUGE % of the inventory is speculative buyers, who will either eat the loss, or rent, I see ths inventory dropping when the “at my price” crowd doesn’t get their offers hit. The bid side of the market is sitting on their hands….waiting for the bottom to fall out. But what if (a majority) of the sellers DON’T HAVE to sell?

    Of course the Condo market is a drastically different animal….and that animal should just be shot. It IS way overbuilt, and is only getting worse as I type…R.I.P. condo commando speculators.

  12. ss says:

    Here’s another “there’s hope for the consumer” tidbit.

    I just got a call from a friend letting me know that Citi is now offering HELO’s for a FIXED 7.31%…for 30 yrs.

    My suggestion is that Citi is not in the business of charity…meaning they think Adjustable rates will be soon FALLING. They want to LOCK IN these 2nd mortgages while prime is this “high”.

    Food for thought…

  13. jw says:

    BR, et al,

    Below is THE most important point from Paul McCulley’s discussion of the Bernanke Fed:

    “[The Committee] … sees core inflation as temporarily boosted by the direct pass through from high energy prices – which should wash out if energy prices stabilize – and from the much discussed Owners Equivalent Rent component of core inflation measures. With growth moderating, it expects inflation to moderate.”

    Those are huge “IF’s”. And with oil stubbornly resting ~$75/bbl taking a break next week is a big roll of the dice.
    jw

  14. j d ess says:

    i’m not sure if the percentages of spec vs real matter as much at this point in the cycle.

    if there 10, 20, 30% less buyers (specs are still buyers, afterall), then the likelihood of getting my price is reduced regardless of whether i have to sell or not. add to that real buyers who now know they are a rarer commodity realize their worth. as such, they wish to be compensated as such by making lower offers, expecting better inducements, maybe waiting longer to see what gets put on the market and at what price.

    i mean, most people don’t *have* to buy either…

    as for condos, man, i am astonished at the amount of building here (chicago) and can’t imagine the hyperconstruction i read about in some other markets (miami). it is unreal.

  15. j d ess says:

    Citi is not in the business of charity…meaning they think Adjustable rates will be soon FALLING.

    anyone know what percentage of these loans citi holds on to? are helo’s bundled and sold off the way mortgages are?

  16. RW says:

    j d, can’t answer the first part of the question WRT Citi’s share of the HELOC securitization business but the answer to the second part — can HELOCs be bundled and sold the same as any other mortgage — is a most definite yes.

    In the absence of firm data from Citi, or any other credit issuer if it comes to that, I don’t know of any way to tell if a given deal is being offered because it can be flipped profitably, considered good enough to keep in the lender’s own portfolio, or simply reflects growing problems in selling money at adjustable rates; i.e., there’s been a fair bit of negative news WRT ARMs lately so consumers may be somewhat more attracted to fixed-rate deals now.

  17. qw says:

    ss:

    “My suggestion is that Citi is not in the business of charity…meaning they think Adjustable rates will be soon FALLING. They want to LOCK IN these 2nd mortgages while prime is this “high”.”

    There is no such thing as locking in a HELO rate for the lender or any mortgage rate if there is not an exclusion to early pay-off. If citi is offering the loan its because they can sell it to someone else at a profit or because they are getting good fees to write the HELO.

    This can’t be used as any kind of guage of Citi’s expectation of future rates.

  18. ArizonaChartist says:

    “there’s been a fair bit of negative news WRT ARMs lately so consumers may be somewhat more attracted to fixed-rate deals now.”

    If your thesis in correct then the demand for fixed-rate deals is at a high level. And if demand is indeed high then by association the rates should be high. So if high demand is driving high rates but rates are still only 7.3% then that reinforces the point that rates have gone up as much as they are going to and may be going back down in the near to intermediate future.

    IMHO, the reality is that we have hit a soft patch which has slowed forward momentum much akin to when you push the clutch in on a car. Demand is temporarily soft which means Citi is having difficulty finding people who want to borrow, whether fixed or variable. Citi can be thought of as representative of the entire lending industry. However, to get back to the car analogy, soon the next gear will get engaged and the acceleration will resume. The only question in my mind is what will that next gear be.

  19. ss says:

    Well I do know that Citi was pushing Libor based loans, at the bottom….fwiw. Me thinks they have an “opinion” on the direction…and it might not be as bad as the “sky is falling” crowd leads you to believe.

  20. RW says:

    “If your thesis in correct then the demand for fixed-rate deals is at a high level.”

    AzChartist, that wouldn’t logically follow unless the trend were already well established I would think but, in any case, it wasn’t my thesis — even characterizing it as a hypothesis would probably be excessive given the relative lack of support one way or the other — and that was actually my point. OTOH your argument that this could be simply be a shifting of gears could well be correct; it will be interesting to see where the next gear is.

    As an aside to “SS”, just a suggestion, but casual ad hominem can become tedious. Epithets such as ‘the sky is falling crowd’ are expected from ‘cult of the man cow’ adherents who have a constituency to promote (e.g., Kudlow) but don’t make for congenial conversation otherwise IMHO. I don’t mind it personally, kind of reminds me of my favorite uncle who sold used cars for years and could tease the marks and hook better than a carny barker, but it wouldn’t surprise me at all if others found it at least mildly irritating. Not really my business of course, not trying to speak for others, just saying.

  21. ss says:

    Is taking the other side of the arguments made in this blog ad hominem…attacking the messenger? Go back and read 90% of the reponses to my posts…quite the opposite.

    The negative cerebral sarcasm from bears is nothing if not consistant.

    Perhaps you only want one view.

  22. j d ess says:

    like i mentioned earlier, i’m glad you are here ss. the perspective keeps me on my toes.

    my perspective is that this whole housing situation has been out of whack for the last 3 years (during which i twice dipped my toes into the water only to find it too hot for my liking). i have a lot of friends who would get burned should my viewpoint be right and, for them, i hope i’m wrong.

    the problem in having this discussion online is it is too easy to go black/white. the sky is either hung high or crashing down. the reality will probably be neither for some time. cloud cover of a varying grey shade could well come in and lower it for a year or two. before clearing. in the meantime, the question is how much damage can the storm do. personally, i do not believe it’s just going to blow over.

  23. whipsaw says:

    per ss:
    “Here’s another “there’s hope for the consumer” tidbit.

    I just got a call from a friend letting me know that Citi is now offering HELO’s for a FIXED 7.31%…for 30 yrs.

    My suggestion is that Citi is not in the business of charity…meaning they think Adjustable rates will be soon FALLING. They want to LOCK IN these 2nd mortgages while prime is this “high”.”

    That’s great news ss and you need to make sure that your friend shares it with Citi because they are apparently under the impression that their fixed rates range from 7.24-11.94% over terms of between 5 and 20 years. But maybe your buddy has a special deal that involves paying 5 points at closing?

  24. whipsaw says:

    per ss:
    “What are these leading indicators telling us?

    - NO recession (but a risk if rates go higher)
    - Inflation clearly coming down

    Thoughts please?????”

    The leading indicator is homebuilders as anyone who has any idea of how this works knows. Maybe you should spend some time reading instead of puking up Republican talking points?

    Pause! or not, the economy is heading down and stocks will go down with it. Maybe bonds will decouple again, maybe not (and if you don’t know what I am talking about, then you need to go back into your corner).

    Your “shorts should be getting nervous” post in another thread revealed how little you understand about trading (probably because you are some 20 year old). Anybody with the balls to short already knew that the roof on SPX is between 1280 and 1290 and that is what defined risk is all about. They also knew that the short term is between 1170 and 1140 which is what trading is all about.

    I am pretty sure that you have never shorted anything in your life, probably little trust fund child. Tell me that I am wrong?