Posts filed under “Currency”

The United States of Subprime

Yesterday, the National Association of Realtors cheerfully forecast that Improvements in Mortgage Markets Bodes Well for Housing in 2008.

Buried deeper in this sunny prediction were their revised expectations for existing
home sales; The NAR now expects a steeper than previously anticipated
drop of 10.8%.

This revision marks the eighth consecutive downwardly revised forecast from the NAR.

What is the cause of all this hosuing angst? Perhaps a clever front page headline in today’s WSJ provides a clue: The United States of Subprime. (free WSJ)

Its an article on just how surprising widespread the sub-prime mortgage usage was over the past 10 years:

"As America’s mortgage markets began unraveling this year, economists
seeking explanations pointed to "subprime" mortgages issued to
low-income, minority and urban borrowers. But an analysis of more than
130 million home loans made over the past decade reveals that risky
mortgages were made in nearly every corner of the nation, from small
towns in the middle of nowhere to inner cities to affluent suburbs . . .

The Journal’s findings reveal that the subprime aftermath is hurting a
far broader array of Americans than many realize, cutting across
differences in income, race and geography. From investors hoping to
strike it rich by speculating on condominiums to the working poor
chasing the homeownership dream, subprime loans burrowed into the heart
of the American financial system — and now are bringing deepening woe.

The data also show that some of the worst excesses of the subprime
binge continued well into 2006, suggesting that the pain could last
through next year and beyond, especially if housing prices remain
sluggish. Some borrowers may not run into trouble for years."

There’s a nice interactive map at the (free) WSJ:



So while we learn today that the sub-prime debacle is even broader and deeper than previously realized. This makes yesterday’s NAR release look all the more like the furious spinning it really was.

Here’s how they put lipstick on the pig:

Conditions in the mortgage market are improving for consumers, which should help to release some pent-up demand in early 2008, according to the latest forecast by the National Association of Realtors.

Lawrence Yun, NAR senior economist, notes that widening credit availability will help turn around home sales.  “Conforming loans are abundantly available at historically favorable mortgage rates.  Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

Yun said it’s important to place the current housing market in perspective, and that 2007 will be the fifth highest year on record for existing-home sales.  “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year – a lot of people are, in fact, buying homes,” he said.  “One out of 16 American households is buying a home this year.  The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

Let’s put the NAR spin aside, and look at the relative strength and weakness of construction:

Two years ago, Residential construction was about $688B per year, while Commercial Building (non-residential) was well under $300B. Residential has now fallen about 25%, while commercial has gained over 30%. Commercial construction has picked up some — indeed, much — of the slack of residential slippage — at least in terms of GDP.    

There is an element to the Residential boom not picked up by Commercial construction: The secondary effect on consumer spending. A major impact of the boom has been housing driven consumer spending. While there is still plenty of MEW going on, it is definitely attenuating. We see revolving credit partially substituting, but that is only a temporary solution.

Back to school season as disappointing, and that typically bodes poorly for the holiday shopping season

chart courtesy of AdvisorIntelligence


The United States of Subprime
Data Show Bad Loans Permeate the Nation;
Pain Could Last Years
WSJ, October 11, 2007; Page A1

Same article at Free WSJ

Existing home sales expected to drop 10.8%
National Association of Realtors says rate will be the lowest since 2002.
AP, October 10 2007: 1:18 PM EDT
Improvement in Mortgage Market Bodes Well for Housing in 2008
National Association of Realtors, October 10, 2007

Category: Consumer Spending, Currency, Economy, Markets, Real Estate, Retail

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Fear of a Dollar Collapse, part II

Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.

Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.

This is simply a measure of how much cash the Fed is injecting into the system.

The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:



Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.

This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.

As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?"  I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless. 

The manifestations of this free  printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.

Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less. 

Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!

For gold, the process is not all that dissimilar.

Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.

Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices:  Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.

Its easy to understand why inflation has been called The Cruelest Tax.


BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.

There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.


Monetary Trends
Federal Reserve Bank of St. Louis’
October 2007

Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1

Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6

Read More

Category: Commodities, Credit, Currency, Energy, Federal Reserve, Inflation

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