Econ-Recon: May 2007: Archives

May 31, 2007

The State Of The Economy: Perception Or Reality? genre: Econ-Recon & Six Degrees of Speculation

Perception vs. Reality

Well the tenuous state of the economy just elbowed its way back into the spotlight amidst the ogling over record highs in the stock exchanges. Gross Domestic Product (GDP) grew by a paltry .6 percent during the first quarter of 2007…less than half of the estimate. If this slow growth were to persist throughout the year, GDP will end the year with total growth of less than 2.5 percent.

My goal isn’t to strike the economic alarm bell, but I suspect that the state of U.S. commerce may not be as rosy as many had hoped…especially when one factors in declining home values and the associated rise in foreclosures. One must also consider the nature of the loan products that are attached to a huge number of these homes as well as the overall shift in credit strategies that can be summed up in the oft heard term "subprime lending".

Let me share some information from a few sources and you can draw your own conclusions as to the economic prospects in the coming months.

From The Associated Press – 05/31/07:

WASHINGTON (AP) -- The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

"We are still keeping our head above water -- barely," said economist Ken Mayland of ClearView Economics.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

So to begin with, the former Fed Chairman estimated that there is a 33% chance of a recession…before the first quarter GDP figures were released. Perhaps his prediction has changed?

The economy, unlike many other measurable statistics, depends in some part on the confidence of the consumer; hence consumer confidence is regularly calculated and reported. At the moment, consumers remain relatively positive about the economy…though I suspect that is driven in large part by the low unemployment figures and the stock market’s recent run of record breaking closings.

I’m of the opinion that gas prices, the drop in home values, rising foreclosure rates, and a looming bear market will soon facilitate a downward shift in confidence…which will likely initiate a compounding effect with regards to the factors that figure into this first quarter dip in economic growth.

From The Elliott Wave Theorist - 05/18/07:

There is an important event for believers in perpetual inflation to explain: the trend of yields from bonds and utility stocks. In the 1970s, prices of bonds and utility stocks were falling, and yields on bonds and utility stocks were rising, because of the onslaught of inflation. But in the past 25 years bond and utility stock prices have gone up, and yields on bonds and utility stocks have gone down. Once again, this situation is contrary to claims that we are experiencing a replay of the inflationary 19-teens or 1970s. Those investing on an inflation theme cannot explain these graphs. But there is a precedent for this time. It is 1928-1929, when bond and utility yields bottomed and prices topped in an environment of expanding credit and a stock market boom. The Dow Jones Utility Average was the last of the Dow averages to peak in 1929, and today it is deeply into wave (5) and therefore near the end of its entire bull market. All these juxtaposed market behaviors make sense only in our context of a terminating credit bubble. This one is just a whole lot bigger than any other in history.

Some economic historians blame rising interest rates into 1929 for the crash that ensued. Those who do must acknowledge that the Fed’s interest rate today is at almost exactly the same level it was then, having risen steadily—and in fact way more in percentage terms—since 2003. So even on this score the setup is the same as it was 1929. Remember also that in 1926 the Florida land boom collapsed. In the current cycle, house prices nationwide topped out in 2005, two years ago. So maybe it’s 1928 now instead of 1929. But that’s a small quibble compared to the erroneous idea that we are enjoying a perpetually inflationary goldilocks economy with perpetually rising investment prices.

As to whether the Fed can induce more borrowing by lowering rates in the next recession, we will have to see, but evidence from the sub-prime and Alt-A mortgage markets suggest more strongly than ever that consumers’ and investors’ capacity for holding debt is maxing out. I see no way out of the current extreme in credit issuance aside from the classic way: a debt implosion.

When thinking about the ability of consumers to absorb more debt, there are several factors to consider. First, Americans are addicted to credit and credit card debt is a key component of that debt. In the month of March alone, consumer credit debt rose by $13.46 billion dollars…and total consumer debt stands at $2.425 trillion dollars. More importantly, consumer debt is anticipated to rise 6.7 percent this year.

At the same time, mortgage debt has evolved to include new products…many that leave homeowners vulnerable to interest rate fluctuations…and others that actually extend the amount of credit beyond the actual value of the home predicated on evidence of the borrowers prior positive credit history (occasionally called 125% loans). The bottom line, as I view the situation, is that much of the recent run of strong economic data is a result of debt spending…debt born of easing credit standards coupled with rising home values and the ability to borrow and spend this perceived paper equity.

From Contrarian Chronicles at MSN Money - 02/26/07:

Meantime, the big question remains: When will folks be forced to connect the dots? Unknowable though the answer may be, my friend in London provided a clue, via a recent e-mail:

"You and I and a select group of others have been all over subprime for months now. But today (last Wednesday) is the first day where equity managers have been in to us, asking questions about subprime. Until today, most of the equity managers knew something bad was happening in subprime, but were prepared to assume it was not going to be a problem for the wider credit market, the economy, and so on.

"Slowly but surely, people are starting to get it, and slowly but surely, I am starting to think that the tipping point in credit -- via a subprime-generated shambles in CDO (collateralized debt obligation) land -- is closer than anybody imagines."

Behind the scenes in the land of financial black boxes, the time bomb is ticking.

Lastly, I would like to share a quote from Easy Al, taken from a speech dated April 8, 2005 (not so very far from the zenith of the real-estate market). I don't talk much about Al Greenspan anymore, mostly because he's gone from the scene, and I spilled so much ink on him before he left. But if you had to pick one man responsible for the imbalances in America and the financial hangover coming our way, it would be Al, who said:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants...With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending...fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

Note that Greenspan was singing the praises of subprime lending while working to keep the economy moving forward…calling it "innovation" and defining it as "advances in technology". Excuse me, but when a lending institution alters its credit standards based upon the need to compete with other lenders in a tightening market that has been in an extended period of acquisition and consolidation…whereby smaller banks and lenders are acquired based upon total assets and growth projections…is there any doubt that "innovation" and "technology" are simply code words for the mechanisms that have been instituted to serve the players that stand to benefit most from merger mania?

If one accepts the rhetoric, one would have to conclude that lenders have been able to magically extract reasonable risk borrowers from the trash heap of bad credit scores. Don’t get me wrong, the extension of credit ought to cut both ways…meaning that there are clearly borrowers who deserve a second chance and there ought to be a means to allow as much…but the historical take on bankers has been that they like to lend money to those who don’t need it. If I understand the new dynamic, the prevailing momentum is to create the rationale to lend more because size and sales have supplanted stability as the gold standard.

From - 05/29/07:

May 29 (Bloomberg) -- Home prices in the U.S. dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March.

The value of a house dropped 1.4 percent in the first three months of the year from the same period in 2006, according to a report today by S&P/Case-Shiller. Prices last fell during the third quarter of 1991.

The retreat may deter owners from tapping into home equity for extra cash, economists said. Combined with record gasoline prices, lower home prices raise concern consumer spending, which accounts for more than two-thirds of the economy, will slow.

The decline in prices may not be large enough to concern the majority of home owners, economists said. The drop in prices in the 12 months ended March pales in comparison to the 157 percent gain over the previous 15 years.

A recovery in housing is being held back by a wave of subprime mortgage defaults, which is throwing homes back onto the market and prompting banks to tighten lending standards for borrowers with poor or limited credit histories.

"These data are probably only just beginning to reflect the impact of problems in the subprime mortgage market,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, in a report to clients. "Further declines seem likely.''

Again, I’m convinced that economic insiders are hesitant to acknowledge the full breadth and depth of the growing list of negative factors. Keep in mind how consumer confidence works when reading that declining home prices "may not be large enough to concern the majority of home owners […] in comparison to the 157 percent gain over the previous 15 years." I view the prior fifteen years of growth as the dam that is holding back a rising tide of reality…a reality that once released from its state of anesthetization will rapidly catapult consumer confidence in the opposite direction.

Human nature is such that we prefer to ignore the obvious if the obvious has the potential to disrupt the status quo. At the same time, our human nature tends to lead us to panic once reality escapes its domicile of denial. Word of mouth about the family down the block that is in foreclosure along with the neighbor that has dropped the price of their home for the fifth time as well as the number of for sale signs mom sees while carpooling the kids to school have a way of breaching our built in barriers to bad news. Once that happens, it’s a new world…one that seemingly emerges overnight. I used to have a saying that went, "Everything’s shit…until it isn’t"…and in this instance, the reverse may well hold true.

There may not be a comparable match for the relationship between perception and reality that exists within the construct of consumer confidence. These two forces have a tremendous impact on the actual direction of our economy…which is a direct byproduct of the economic decisions we make. As it now sits, if today’s perceptions cannot withstand the growing body of evidence that foreshadows economic tumult, we may be fast approaching an all too dreadful day of awakening.

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Daniel DiRito | May 31, 2007 | 12:29 PM | link | Comments (0)
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May 30, 2007

Dr. X - Illegal Immigration And Unemployment genre: Econ-Recon & Polispeak & Six Degrees of Speculation

Illegal immigration is a more complicated, multi-layered issue than the heated words in this political debate often suggest. I really don't have a side — just some observations, some concerns and a few opinions. So, don't take this as a "pro-illegal" immigration position on my part, but among the 18 states that have set new records with historically low rates of joblessness, one finds California, New Mexico, Arizona and Texas.

This data runs against the grain of resentment that can be found among many of those who are extremely troubled by illegal immigration. Of course, these record low rates of joblessness don't prove that illegal immigration doesn't take ANY jobs from Americans. If, however, one's contention is that illegal immigration takes jobs from legals and from American citizens in the aggregate, you've either got to collect some data and start testing that hypothesis or you will be arguing entirely on the basis of fanciful theory — something that is particularly suspect when the argument is associated with resentment. At the very least, it is difficult to look at data like this and declare that illegal immigration has had a significant negative effect on the employment prospects of legals and Americans.

Many economic and cultural issues like the immigration issue involve dynamic subtleties that don't lend themselves to simple bifurcation into all good versus all bad positions. The primitive side of the human mind wants to simplify things in just this way because, for a variety of reasons, a world in which our wants, desires and opinions are unassailably pure is more manageable and bearable. In service of achieving such simplicity, however, the truth has a tendency to get back-written to fit assumptions that either aren't supported by data or are supported by fudged and cherry-picked data.

Previously, for example, I wrote about a fictionalized history of immigration in response to LaShawn Barber's ill-informed moralizing on the issue. Barber's version of history represents an instance of how someone operating with nothing but a data set simplified by a puerile imagination tends to avoid the effort of investigation if those fantasy "facts" support an opinion they hold dear.

H/T: The News Junkie

Cross-posted at Dr. X's Free Associations

Dr. X | May 30, 2007 | 1:58 PM | link | Comments (0)
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May 26, 2007

Perfect Storm: Rising Tide But The Boats Won't Float genre: Econ-Recon & Hip-Gnosis & Polispeak & Six Degrees of Speculation

Perfect Storm

I’ve always been fascinated with society, psychology, and the human condition…especially from the perspective of what the future may hold. Don’t misinterpret that to mean that I think I can predict the future; rather I try to predict how the state of thought…what people believe, what they are saying, and how they are saying it today…will impact their experiences some time in the not so distant future.

Additionally, I love it when my musings can connect several disparate dots into a snapshot of what might unfold in that regard. Lastly, I adore words…how they are used, what they can and should mean, how they shape our hopes and beliefs, and how they can often be used to say one thing while intending or imparting another. Some say that we are what we eat…I say we are what we hear…which becomes what we say.

A couple of articles caught my attention this morning and allowed me to get lost in one of my moments of ADD induced speculation. First, let me offer the backdrop. Of late, I’ve spent a lot of time focused on the state of parenting and the messages today’s parents are giving their children which will influence how they will function in the world as adults. Add in the influence of religion and its tendency to support absolutist thinking, the preoccupation with being famous and being number one and you have a snapshot of the launching point for my contemplation.

The first article deals with the issue of climate change and the impact of global warming. According to a Washington Post article, the United States appears prepared to reject the proposal to be offered at the upcoming G8 Summit that would set limits on greenhouse gas emissions in order to cap the rise in global temperature.

Representatives from the world's leading industrial nations met the past two days in Heiligendamm, Germany, to negotiate over German Chancellor Angela Merkel's proposed statement, which calls for limiting the worldwide temperature rise this century to 3.6 degrees Fahrenheit and cutting global greenhouse gas emissions to 50 percent below 1990 levels by 2050.

Bush administration officials, who raised similar objections in April, rejected the idea of setting mandatory emissions targets as well as language calling for G-8 nations to raise overall energy efficiencies by 20 percent by 2020. With less than two weeks remaining, said sources familiar with the talks, the climate document is the only unresolved issue in the statements the world leaders are expected to sign at the June 6-8 summit.

"The U.S. still has serious, fundamental concerns about this draft statement," a paper dated May 14 states. "The treatment of climate change runs counter to our overall position and crosses multiple 'red lines' in terms of what we simply cannot agree to…We have tried to 'tread lightly' but there is only so far we can go given our fundamental opposition to the German position."

As I’ve followed the global warming debate, a couple things stand out to me. One, the projections suggest that if the trends were to in fact proceed unabated, rising ocean levels would threaten some of this country’s major population centers. Two, those rising waters are apparently being taxed to absorb the rising levels of carbon dioxide and should they reach saturation, the problems will only accelerate. At some point the entire system goes awry and all hell breaks loose…think high waters and boats…perhaps Noah’s arc meets Poseidon Adventure.

I read the second article at MSNBC. That article, in its broadest terms, is a discussion of the state of the American Dream…the promise of advancing prosperity from generation to generation. Toss in the oft heard GOP theory that the rising tide lifts all boats and you’ll begin to see some rhyme to my reason.

The American dream has always held that each generation will enjoy a higher standard of living than the previous one, and that is still true, as measured by household income.

But the generational gains are slowing, and the increased participation of women in the work force is the only thing keeping the dream alive, according to an analysis of Census data released Friday.

A generation ago, American men in their thirties had median annual incomes of about $40,000 compared with men of the same age who now make about $35,000 a year, adjusted for inflation. That’s a 12.5 percent drop between 1974 and 2004, according to the report from the Pew Charitable Trusts’ Economic Mobility Project.

To be sure, household incomes rose during the same period, but only because there are more full-time working women, the report said.

"Today’s data suggest that during a 30-year period of economic expansion, a rising tide did not lift all boats," Morton said in a release accompanying the report, "Economic Mobility: Is the American Dream Alive and Well?"

Of course, the men who run American companies don’t have too much to complain about. CEO pay increased to 262 times the average worker’s pay in 2005 from 35 times in 1978, according to the report’s analysis of Congressional Budget Office statistics.

Going back to 1820, per capita gross domestic product in the United States has grown an average of 52 percent for each 30-year generation, according to the report. But since 1973, median family income has grown only 0.6 percent per year, a rate that produces just a 17 percent increase over a generation.

"Thus, unless the rate of economic growth increases, the next generation will experience an improvement in its standard of living that is only one-third as large as the historical average for earlier generations," the report said.

Stay with me, I promise a big finish (wink, wink).

So when you take the words found in these two articles and factor in the issues from the backdrop, one can begin to see the images that will form a preliminary snapshot of our future human condition premised upon the existing and established social and psychological influences.

I’ll attempt to explain. Generally speaking, it seems to me that many of today’s parents are raising the expectations found in their children. Call it the American Idol mentality morphs with the Tiger Woods phenomenon…meaning mom and dad say to themselves, “My kid has star potential so I simply need to cultivate it from the outset". My bottom line assumption suggests that a growing number of parents believe every child can, should, and will be coached such that they are eventually discovered and catapulted to their rightful position in the spotlight. Call it the American Dream juiced up on steroids (h/t to David Letterman for the steroids slang).

At the same time, we see the data from the study referenced above suggesting that the economic prospects are moving in a diametrically opposite direction…and we have yet to consider the unknown though increasingly predictable ramifications of climate change that could render all prior historical equations virtually useless. Oh, and did I mention the case of the missing honey bees?

I’ve previously argued that humanity has continued to move towards a construct of diverging identities…in other words there is a greater divide between the outward lives we live and the more obscure, though ever lurking in the background, state of hyper reality…those moments when the facade of the outer world identity is stripped of its accoutrements to reveal the starkness of our real identity.

A couple examples might be helpful. It’s the eighteen year old young woman that dad has convinced is destined to be the next Serena Williams who finds herself entering college without a tennis scholarship and void of other measures of self worth…though still convinced her exaggerated “manifest destiny" is just around the corner.

It’s the thirty five year old son who was handed success in the form of family instituted social security when he joined his maternal grandfather’s business as a vice president the day he graduated from college…now left to realize the day after grandfather has entered a nursing home with Alzheimer’s that sales have evaporated in direct relation to grandpa’s advancing disconnect and that what little is left of a fortune will now be needed to pay for round the clock care.

The reality is that this aquarium we call America isn’t big enough to hold the advancing expectations we have sought to institutionalize and that we have exponentially instilled in the next generation. Worse yet, we haven’t yet equipped that generation with the boat to survive the rising tide…no, not the rising tide of success that will raise all boats…but the rising tide of a global economy that will subject the United States to ever increasing global economic realities. In truth, boats be damned…people are going to need to know how to swim…and no, there won’t be any gold medals awarded.

At the same time, we have a government that is intent on borrowing money in order to spend its way out of each new economic setback. Simultaneously, they ignore the warnings of an ever advancing science that suggests an entirely new and ominous cash eating calamity in the form of global climate change is just beyond the rising liquid horizon.

The bright future that has become the staple of our private and political rhetoric (the words we speak) may be nothing more than the glow of an approaching apocalypse…no, not the one associated with the rapture that runs rampant in religious imagery and that promises an idyllic after life…the one that was there in full view for all to see and fully of our own human making…the one we chose to ignore because our best human attributes and identities had atrophied such that we lacked the will to right the ship before it succumbed to the weight of an endless burden of belligerence and betrayal…particularly that betrayal which suggested that god would save us…because we chose to conclude that that would be easier than saving ourselves.

The curtain falls.

Daniel DiRito | May 26, 2007 | 12:11 PM | link | Comments (2)
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