Category: Economy

Krugman Just Called Ben Bernanke a Wanker

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In his New York Times blog.

It was pretty polite, but it was also rather firm:

Here’s the story of two metro areas, Los Angeles (which has run out of room to sprawl) and Atlanta, the ultimate Sprawl City:

Huge bubble in LA; nothing in Atlanta. Looking at the national data was deeply misleading.

So here’s one of the charts from Bernanke’s paper at the meetings:

Yep, he’s using average US housing prices as a bubble indicator. This wouldn’t matter if the division between Flatland and the Zoned Zone was comparable across the advanced world, but it isn’t: other advanced countries lack sprawling metros comparable to Atlanta or Houston. So we aren’t learning much from this comparison.

And the whole thing suggests that the Fed hasn’t learned much about how to identify housing bubbles.

(emphasis mine)

Meow! I whole heartedly approve.

Economics Update

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first time unemployment claims rose slightly this week, up 1,000 to 434,000, down from the 490,000 at this time last year, and the 4 week average fell to 450,250.

I would note that this number needs to be below about 400K before non-farm payroll increases, and if the December numbers show an increase in NFP, it’s seasonal adjustment bull sh$#.

The numbers are better, but it’s still, “better in a not getting worse as fast,” way.

That being said, retail sales surprised on the upside, with December sales up 3% over the 2008 numbers, though still down by about 2-3% FROM 2007.

We also had some big news in central bank land, with China’s central bank raising its benchmark rate, with 3-month bills increasing to 1.3684%, up 4.04 basis points (0.0404%) from the rate that it had maintained for the past 4 months.

It indicates that they will be tightening on the money supply, which could get interesting, because much of the Chinese stock market is smoke and mirrors. Additionally, it may be a first step in allowing the Yuan to drift higher, as higher returns make the currency more attractive.

On the less surprising side of stupid central bank tricks, the Bank of England left both rates and policy unchanged, which means that they are still printing money hand over fist.

Also, Treasurys fell slightly, though I think that this is concern regarding the NFP payroll data.

Energy and currency surprised. The surprise increase in Chinese rates would normally presage an increase in oil prices, because there is the assumption that there is additional demand that is being tamped down, and the dollar down, because the Yuan becomes more attractive, but in fact, oil fell slightly, to below $ 83/bbl, though that might be profit taking, and the dollar rose fairly sharply.

John Taylor Calls out Ben Bernanke

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Ben Bernanke in his younger days

He politely says that Bernanke is full of it, and that low rates caused the bubble:

John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he [Bernanke] said the Fed’s monetary policy after the 2001 recession “appears to have been reasonably appropriate” and that better regulation would have been more effective than higher rates in curbing the boom.

The Taylor rule, from the Wiki:

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the U.S. economist John B. Taylor in 1993.

I’m not sure of the value of the Taylor rule, there seem to be some “miracle occurs here” bits in the coefficients used, but it is significant that someone with his sort of academic credentials (he has a fracking rule named after him) is coming out hard against the Fed Chairman’s excuses.

Economics Update

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H/t Calculated Risk

Well, the ADP private employment survey is saying that the private sector lost 84,000 jobs in December, and the Institute for Supply Management’s non manufacturing index rose to 50.1, up from 48.7 in November, and not as good as forecast, but still showing a smidgen of growth.

Real estate was rather grim though, with mortgage applications hitting (seasonally adjusted) a 6 month low, and mortgage purchase applications (top pic) hitting a 12 year low.

Basically this means that people are not buying homes, they are just refinancing, though, with interest rates inching up, they aren’t doing that as much either.

Additionally, a feature of suburban blight, the strip mall, is taking a hit with vacancies hitting 10.6%, an 18 year high.

I keep saying it, but no one listens: we need some inflation here.

In energy, the cold weather drove both crude oil and natural gas higher, while in currency, the dollar fell slightly vs. the Euro, as traders make up their minds about whether to be optimists of pessimists.

Economics Update

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If anyone thinks that real estate can lead us out of of a recession, or even that we can, as Mssrs. Obama, Geithner, Summers, etc., think that we can reinflate the bubble, you need to look no further than the National Association of Realtors (NAR) Pending Home Sales index, which fell 16% in November well under the forecast of -2%, though it is still up year over year.

They are trying to reinflate a balloon with a hole in it.

In any case, the horrible housing numbers drove treasury prices up as investors fled to safety.

It does appear, however, that foreign investors were going elsewhere, with the dollar falling against the yen, and in energy .

Economics Update

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The Institute for Supply Management’s national factory index just rose to 55.9, the highest reading on factory activity since April 2006.

It’s good news, but but as Krugman notes, it may just be an inventory bounce:

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

That being said, we are seeing increased demands for capital from small businesses, with a 37% year over year increase in the Small Business Administration’s 7(a) lending program, a total of $3.8 billion.

On the down side, construction spending fell for the 7th, falling 0.6%, and it has been reported that US bankruptcies are up 32% in 2008.

On the other side of the pond, new orders to factories slowed in the Euro zone.

In energy, low temperatures and a Russia-Belarus price dispute drove Oil above $80/bbl.

In currency, the US dollar fells on the good ISM factory report, as risk appetite improved.

What 10 Years of Conservatives Getting What They Wanted Got Us

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Note that private employment rolls actually fell


And in handy bar graph form

The Washington Post correctly called the “Aughts” a lost decade, inflation adjusted median income fell (for the first time on record), non-farm payroll experienced no growth (for the first time on record), household wealth fell (for the first time on record), GDP rose by the lowest number since at least the Great Depression.

The same goes for the stock market, only in this case, the records go back 200 years.

We have had a grand experiment of embracing conservative philosophy, with a highly right wing executive and a compliant legislative branch, since 2001 and the result has been miserable failure.

The past decade may not be as bad as the Great Depression, but it beats anything else in the 20th or 21st century, and it is not over yet.

Here’s a Surprise

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Nearly flat for 2 years

One of the things that I have occasionally remarked on is how data for M3, one of the broader measures of money supply is no longer collected by the Fed.

The claim is that it’s a conspiracy to conceal the reckless and inflationary expansion of the money supply, but as Tim Iacono shows, it hasn’t really happened.

Basically, the Fed may be printing money, but banks are not lending, so the money supply, at least the money supply as described by the M3, is basically flat, so we are not in an inflationary situation.

To my mind, this is a bad thing, since, as I have stated many times before, increasing inflation will have the effect of moving the price many assets above the amount of money owed on them.

A description of the various measures of money, cut-and-pasted from the Wiki, is below the fold:

  • M0: Notes and coins (currency) in circulation and in bank vaults. In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.
  • MB: Equals M0 + reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). MB is referred to as the monetary base or total currency. This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.
  • M1: M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Bank reserves are not included in M1.
  • M2: Equals M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and “close substitutes” for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.
  • M3: Equals M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. M3 is no longer published or revealed to the public by the US central bank. However, it is estimated by the web site Shadow Government Statistics. It is also estimated on a weekly basis by the web site Now and the Future.
  • MZM: Money with zero maturity. This measure equals M2 plus all money market funds, minus time deposits. It measures the supply of financial assets redeemable at par on demand.

Economics: Year End Data Points

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H/t The Big Picture

The stock market is up significantly for the year, but note that the picture is for the Dow Jones Industrial Average, which is at best an imperfect gauge.

Also note that rents fell 3.5% in 2009, once you factor in things like months of free rent and flat screen TVs (!) for signing a lease.

That means that home prices need to fall an additional 3.5% to hit historical rent-own ratios.

But if the real estate news presages deflation, then the fact that commodities posted their biggest annual gain since 1971, which indicates that once a real recovery starts, prices may go up significantly.

Since, I actually favor inflation as a way to get out of this mess, people repay loans in devalued currency, and hence are better able to pay off those loans, I’m hoping for significant (6-10%) inflation in the near future.

Economics Update (For the Week)

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Yes, it does appear that the seasonal adjustment for the week after Christmas is whack

The lede for the week is obviously that first time unemployment claims fell to the lowest level in 17 months, down 22K to 432K, though, as Brad Delong notes, this is likely because of problems with the seasonal adjustment for this week. (See graph pr0n).

Continuing claims, as well as the 4 week average fell too, but emergency claims, for people (like me shortly) who exhausted their regular benefits (i.e. out of work more than 6 months), rose sharply, by 199 thousand to 4.82 million, a 4.1% jump in one week. (!)

Earlier this week, the Institute for Supply Management released its Chicago index, aka the Purchasing Managers’ Index (PMI), and it unexpectedly jumped to 60 in December from 56.1 in November………Only they just revised it, and oops, it the PMI was only 58.7, largely on a downward revision on employment…………Happy, happy, joy, joy.

That’s not to say that the numbers aren’t better, they are better, much like the ATA Truck Tonnage Index November numbers, and the ShopperTrak year over year retail sales for last week, though the latter saw a drop in traffic.

In real estate, the 30-year fixed mortgage rate rose to a 4 month high, 5.14%, which is still at a level which is historically low, and the recent uptick in housing prices seems to have petered out, with the Case-Shiller index showing flat prices in October, following 4 straight months of price increases.

This is unsurprising, as home price subsidy new home buyer tax credit was supposed to end in November, and homes needed to close by November 30, which meant that there were a lot of sellers who knew that they had to move their houses quickly, or not at all.

Houses are still well above trend, both in terms of rent to own price to income ratio, though you still have claims that housing affordability is better than the historical numbers, because the mortgage rates are still incredibly (see above) low.

If rates return to their historical levels, about 9% for the 30-year fixed, we have a downward pressure on house prices of roughly 1/3, because people buy houses on monthly payment, not price.

We do have some good international news, with South Korean exports rising rapidly, and Chinese manufacturing growing at a 20-month high, though I wonder how much of the latter is the result of provincial bureaucrats goosing the numbers, or encouraging local industries to over produce, in order to score brownie points with Beijing.

Economics Update

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New Home Sales Not Just Ugly, but Fugly!
h/t Calculated Risk

Yesterday, I noted the jump in existing home sales, and posited that this was almost entirely due to people rushing to get in under the wire on the new home buyer house credit, well today, we have the new home sales numbers, and they plunged by 11.3%, which validates my thesis.

Basically, existing home sales numbers are recorded at closing, while new home sales are recorded when the contract is signed, which means that the new home sales numbers lead existing home sales by 30-60 days, so we have a snapshot of what happens when people rushing to secure a tax credit stop rushing, and it ain’t pretty.

It also explains why home mortgage application volume fell.

As I’ve said before, real estate won’t lead us out of a recession, it will follow.

On the other hand, personal income and spending rose in November, which is a sign of improvement, and the latest CNN/Opinion Research and Reuters/University of Michigan surveys show an improvement in consumer sentiment, though of the “slightly less suckage” rather than the “going well” variety..

One interesting development in the 3rd quarter of this year was that central banks have cut purchases of dollars for reserves to a record low, “30 percent of new foreign-exchange reserves,” which implies a slow walk away from the dollar by central banks.

Even so, the dollar rose today, and Oil also rose on a surprise drop in inventories………Which raises the question, why are inventories always surprising folks?

Economics Update

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H/t Barry Ritholtz

New home sales, effect of tax credit h/t Barry Ritholtz basic graph h/t Calculated Risk


H/t Calculated Risk

So, we have another revision of the GDP numbers for the 3rd quarter, and the GDP number falls again, down from an initial estimate of 3.5% to the first official figures of 2.8%, and now it has been revealed that the GDP grew at just 2.2%. (top pic)

The more accurate data that comes in, the worse the news.

As an aside, the US Bureau of Economic Analysis always does this, that is to say that the numbers get worse when better data comes in, which implies a systemic problem that needs to be fixed.

On the other hand, the UK initial numbers were revised in the opposite direction, with a contraction of -0.2%, up from the initial estimate of -0.3%.

The news from down under is not grand either, with the New Zealand economy’s GDP missing forecasts.

Still, the Philadelphia Bank of the Federal Reserve’s State Coincident Index looks better (bottom pic), with at least marginal levels of growth in 1/3 of the states.

On the other hand, we had some good news in real estate, where the National Association of Realtors has reported existing home sales rose 7.4%, to the highest level since February 2007:, though even the NAR admits that this is largely due to people rushing to buy houses before the home buyer tax credit expires.

As both CR and Barry Ritholtz note (2nd pic), this a function of changes and/or perceived changes in tax policy, so December will give a real picture of where the housing market is.

It should be noted that a remarkably unpleasant milestone was passed though with, the number of mortgages in national banks, which report to the OCC, reporting that for the first time ever, over one million mortgages were in foreclosure in the 3rd quarter.

Additionally, we are seeing signs of problems among small banks and businesses, with more small bank TARP recipients not paying dividends [on edit: a clarification, they are not paying dividents on their RARP money, so they are technically in default], and small business bankruptcies are up 81% YoY in California.

In energy, OPEC kept oil production levels flat, but has promised to more rigorously enforce the current limits, which is a de facto (but rather small) cut in production, which drove oil higher, even though the dollar rose on the surprisingly strong home sale report.

Economics Update

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More bad news in real estate, with commercial real estate prices falling to a 7-year low, and the latest figures on home prices showing a year over year decline of 7.8%.

More generally, the Chicago Bank of the Federal Reserve’s economic index rose slightly in November, from -1.02 in October (indicating growth below the historical trend) to -0.32 (indicating growth below, but closer to the historical trend).

We also had good news in Japan, where exports rose sharply.

In treasurys, bond prices fell, as investors moved into US equities.

To move into those equities, foreign investors bought dollars, which drove the dollar, and the rising dollar drove oil down.

Likely Record Snow Today

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Apologies for the crappy cell phone camera pic

Well, we’re getting a lot of snow here, it’s still coming down, and the estimate is that it will be in the range of 18-24 inches when all is said and done should beat the December record of 11½ inches in a single day and 14 inches in a 2-day storm, and may actually break the all-time record set in February 2003 in the North American blizzard of 2003 of 28.2 inches if it exceeds what the weatherman are reporting by a bit.

We still have not seen a snow plow on my street, though it has seen the more heavily traveled streets in the area.

Snow is expected to continue until tapering off sometime tomorrow.

[on edit]Not a big deal for me, but with 1 week left to go before American Greed and Conspicuous Consumption day, it looks like this will hammer retailers, because for much of the Eastern seaboard, this weekend is done, and there may still be a lot of closings, etc. on Monday.

Economics Update

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Well, someone sliced and diced the numbers, and the unemployment picture continues to improve, with unemployment dropping in 36 States in November, though this U3, and not the more expansive, and to my mind more accurate U6.

We are also seeing a marked improvement in German business confidence this month.

In real estate, we have another shoe dropping, with Moody’s Investors Service stating its intend to review $143 billion in residential mortgage backed securities (RMBS) with an eye toward downgrading them, because their loss rates have continued to climb.

In currency and energy, the reversed the past few days’ course, with oil rising, and the dollar weakening, but these may just be traders unwinding positions that they accumulated over the past week.

Economics Update

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h/t Calculated Risk

Yea, sure, the recession is over. That’s why initial jobless claims rose again this week, up 7000 to 480,000, and continuing claims rose as well, though the 4-week average fell.

I’m beginning to think that those “stunning” NFP payroll numbers in November were an artifact of a seasonal correction of some kind.

In any case, real estate is not looking so hot, with the 30-year fixed mortgage rate rising again, and the estimates for the “shadow inventory” in housing , basically homes that are being foreclosed on, or are being held off the market by the foreclosing institutions to keep from depressing prices too much was revised upward:

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic.

The “shadow inventory” rose from 1.1 million a year earlier. Such properties include those taken over by banks and mortgage companies and those where the loans are at least 90 days delinquent, the Santa Ana, California-based research firm said in a report today. The number of unsold homes listed for sale was 3.8 million in September, down from 4.7 million a year earlier, First American said.

So I think that any claim to a recovery in residential real estate has been, greatly exaggerated.

That being said, the Conference Board’s Index of Leading Economic Indicators, as well as the Philadelphia Federal Reserve Bank’s Business Outlook Survey both showed signs of growth, though, as Calculated Risk notes, the recovery is weaker than in earlier months, indicating, perhaps, the start of a “W” downturn.

In either case, the LEI and the Philly Fed report did not seem to have much of an effect on Treasuries, which rose, meaning that the yield dropped, largely on concerns about Greece.

This sentiment also drove the dollar up.

In energy, the strong dollar drove oil down, but natural gas rose, largely on the cold weather and smaller than expected inventory numbers.

Economics Update

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Rent-price ratio h/t Calculated Risk

So, the Open Marked Committee of the Federal Reserve left rates unchanged, though they do seem set on ending their quantitative easing over the next few months:

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009.

Full FOMC statement is after the break.

The bond markets responded with Treasurys falling, and yields rising.

We actually saw a non trivial inflation rate in November, with the Consumer Price Index rising 0.4% in November, though that was energy and food, the core rate was 0%.

There is a troubling data point in the data though, rent, and owners’ imputed rent both fell, which is not a problem in terms of inflation, but is in terms of real estate.

Basically, even with house prices having fallen in the past 2 years, they are still above the traditional price-to-rent ratio trend, and as rents, fall, homes have to fall further to get back to the traditional (and sane) range, so there is more pain in real estate.

In more real estate news, new home construction jumping 8.9% from October to November, though it is down 12.4% year over year, (PDF link) while mortgage applications, and the rate for a 30-year fixed mortgage, rose marginally last week.

The statements on the unwinding of quantitative easing pushed the dollar up.

In energy, oil rose again, on reports of falling inventories.

Press Release

Release Date: December 16, 2009

For immediate release

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.