Credit is also a problem. It expands rapidly before crises, but post-crash the ratio of credit to GDP declines by an amount comparable to the pre-crisis surge. However, this deleveraging is often delayed and protracted.... if we continue as others have before, the need to deleverage will dampen employment and growth for some time to come.... In such circumstances slow growth often becomes a self-fulfilling prophecy produced by timid authorities, who neither supported spending nor dealt with the capital-adequacy problems at large banks.... Financial supervisors want to believe that troubled banks are temporarily illiquid, not permanently insolvent.... the bigger worry remains the assumption that dust has begun to settle; that the shock from the crisis is temporary, when it is likely to be deep and persistentfrom ICI via Moody's via Paul Kedrosky:
Bond bubble - a sterile debate on semantics. James Montier.
bond valuation based on 3 components: the real yield, expected inflation and an inflation risk premium; with the first at about 1% right now (via TIPs), the second at 1.5% (via nominals - TIPs), and the last at 0.25-0.5%; fair value under normal inflation would be 4%
unless you believe that Japan is correct template for the US (i.e. inflation will be zero for the next decade), government bonds don’t offer an attractive return as a buy and hold proposition.
he goes on to say that the market must be implying about a 70% chance of the U.S. turning Japanese (20% or normal, 10% of high inflation); then says
It is possible to build a speculative case for bond investment (i.e. riding the deflationary news flow down), however, as ever, this leaves participants with the conundrum of Cinderella’s ball as described by Warren Buffett “The giddy participants all plan to leave just seconds before midnight. There is a problem though: They are dancing in a room in which the clocks have no hands!” Personally I prefer to stick to investment rather than speculation.
as highlighted by Mish, remember when Rosie said:
"Guess how many homes prices above $750k managed to sell in July. Answer — zero, nada, rien; and for the second month in a row."
well, he shoulda been suspicious of that; turns out, according to the Census Bureau (hat tip: Mish), which quotes its data in thousands of homes and using round numbers (so, the total for all price levels was 25k, but we're not sure where in between 24,501 or 25,499 that was), the (Z) they put in for the price level of $750,000 and over means that there were less than 500 units
Home prices: a look at underlying supply and demand forces. charts and quotes from BoA, as posted on zerohedge.
I hadn't yet found solid data on U.S. household formation, to compare with the inventory of homes on the market; BoA/ML spares me the need (as posted on zero hedge), as they've calculated it; and its rather shocking: household formation was strongly positive in 2001-2006 (1.2 million annually), but was more than cut in half during the period from 2007-2009 (0.5 mil, a drop of 0.7mil); of course, I knew it had fallen, given that the homeownership rate had fallen, but wouldn't have expected that much
so, homebuilders have dramatically slashed their new construction; but, meanwhile, foreclosures have put new supply on the market, so, net-net, supply has not normalized and still exceeds housing demand; BoA calculates an excess of 1.87mil vacant homes (given that homeowner vacancy rates and rental vacancy rates are much higher than normal)
BoA concludes:
Unlike in prior recoveries, it is clear that housing will lag rather than lead the recovery. The monetary policy transmission typically has a very strong impact in the housing market – low rates encourage home sales and greater residential investment. In turn, job creation picks up in the construction sector, further supporting consumer spending and home sales, and creating a virtuous cycle. This feedback loop is currently broken. Mortgage rates have plunged to record lows, and yet have done little to stimulate home purchases because credit conditions are still incredibly tight and consumer confidence is depressed. That said, we believe the direct drag from housing, through construction, is nearly over. Our forecasts for housing starts imply that residential investment will subtract from growth in 3Q, but then consistently add to output going forward. Still, the contribution to growth will be feeble relative to prior cycles, where housing was decidedly the force of growth...
Our baseline view is that national home prices will edge lower over the rest of the year and then bounce around the bottom for some time. The downside risk is that foreclosures flood the market at a rapid pace, depressing home prices greatly, which could tip the overall economy back into recession.
other than Meredith Whitney, Mike Mayo is the only other financials analyst that I'm aware of being very vocal about his/her skeptical view on financials and being very blunt and even confrontational with management:
Mike Mayo Tells Clients Numbers Out Of Citi Can Not Be Trusted. via zerohedge.
The trap we're in. Paul Krugman, NYT.
The Taylor Rule says that, given where inflation is now, interest rates should be negative; but, of course, they can't be (see his graph)
The crucial thing to understand about this position is that it’s not self-correcting. On the contrary, as inflation falls over time and possibly goes to actual deflation, we sink deeper into the trap.
more background from PK here
data today:
Canadian GDP for June, came in at expectattions of 0.2%, but for Q2 came in at 2.0%, vs. expectations of 2.5%, and Q1 was revised down to 5.8% from 6.1%
in the U.S., S&P/Case-Shiller Composite-20 up 4.2% YoY through June, vs +3.5% YoY expected (down 28% from the peak), and the national index was up 3.6% YoY through the 2nd quarter, up from 2.3% at the end of Q1 (note that this data is 2 months old --- its a 3mth rolling average of April, May and June) and was relevant for the period before the tax credit ended; as per Calculated Risk, prices are probably falling right now (starting in July), but this will not show up in the Case-Shiller index for a few months since this is an average of three months)
Chicago Purchasing Managers was a bit below expectations, at 56.7, down from 62.3; and ditto for NAPM Milwaukee, down to 59 from 66; but consumer confidence beat expectations, at 53.5
if you want to quickly check out state of European sovereign yields, check out Bloomberg's interactive charts
the code for
Germany is GDBR10:IND
Greece is GGGB10YR:IND
Ireland is GIGB10YR:IND
Portugal is GSPT10YR:IND
Spain is GSPG10YR:IND
other fare:
this is hilarious --- The truth about Somali pirates. Broyhill Asset Mgmt, The View from the Blue Ridge.
this too is amusing --- We didn't see it coming.
this is in no way amusing --- Lawsuit challenges Obama's power to kill citizens without due process. Glenn Greenwald, Salon --- how can the U.S. be a country in which assassination of citizens without due process is even contemplated, much less allowed?!
and this is interesting --- the author of Cool It!, Bjorn Lomborg, recants
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