Tuesday, July 14, 2009

Mid-year forecast review

At the end of last year I made a series of predictions. I meant to review those at mid-year, but missed by a few days. Too much sun and relaxation can do that to you, I suppose. Here's what I said back then, followed by a quick summary of where things stand now. Not too bad, I think.

Inflation: headline inflation has gone down, but core inflation hasn't; once oil prices bottom (which I think is happening), all measures of inflation will head higher; I don't see a hyperinflation yet, but I do see inflation that is significantly higher than what is priced into the bond market. The main driver of higher inflation will be the Fed's inability to withdraw its massive liquidity injections in a timely fashion; they will prefer to err on the side of inflation rather than risk a weaker economy.

Growth: the economy is going to recover sooner than the market expects, with the bottom in activity coming before mid-2009; the recovery will be sub-par however, due to the drag of increased fiscal spending and slowly rising inflation.

Housing: the bottom in construction activity has essentially arrived; whether construction drops another 10% or not is at this point immaterial; housing prices are rapidly approaching a bottom, which should come well before June '09; mortgage rates are now low enough to make a huge difference.

Interest rates: Treasury yields are essentially at their lows and will be significantly higher by the end of next year. TIPS yields will hold steady or fall as nominal yields rise.

Spreads: Spreads have seen their highs and will continue to narrow.

Equities: We have seen the lows in equity prices; equity prices will lag other risk asset prices, but they will be significantly higher by the end of next year.

Commodities: Prices are essentially at their lows; whether they drop another 10% is immaterial; prices are beginning a bottoming process; oil prices are unlikely to drop below $35; commodities may take awhile to move higher, but they will be higher within 2 years.

Dollar: The dollar is unlikely to make further gains against most major currencies, given the Fed's hyper-easy stance, and is likely to fall against emerging market currencies as commodity prices rise.
Inflation has definitely come in above expectations, as detailed in my previous post. The economy has probably bottomed recently, and is on track for a sub-par recovery. Housing looks very close to a bottom. Treasury yields are up significantly. TIPS yields are relatively unchanged. Spreads have come down signficantly. Equities are about unchanged, but have recovered significantly from the lows of early March (lows that I didn't expect). Commodities are up across the board. The dollar is slightly weaker overall, and significantly weaker relative to emerging market currencies.

14 comments:

alstry said...

You keep saying housing is stabilizing....the data simply fails to support your assertion:

For the third consecutive month, foreclosure sales jumped significantly as lenders come off the moratorium. Foreclosure sales increased by 24.7 percent following a 31.9 percent increase in May, and a 35 percent April increase. Notices of Trustee Sale dropped by an unexpected 28.7 percent, with the timing of the drop indicating that it was in response to the California Foreclosure Prevention Act. This law was widely believed to have little or no impact on foreclosure filings, as it exempted the majority of large lenders that operate in the state.
...
After a 4.2 percent drop the prior month, Notices of Default, the initial step in the foreclosure process, rose by 11.8 percent to the second highest level on record at 45,691 filings. Year-overyear filings increased by 10.0 percent from June of 2008.


Now Obama is likely to drive the values of homes down even further with this potential proposal:

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years ...

The above courtesy of Calculated Risk and your wonderful President who is likely to drive home values down ANOTHER 50% with his creative proposals to compensate for evaporating family incomes.

Mark A. Sadowski said...

Scott,
I agree with Alstry (probably for vastly different reasons). I see no sign of stabilizing housing prices yet. In fact I suspect the real avalanche of collapsing housing prices in the Northeast (the most important part of the country economically) has only just started to gain momentum. To paraphrase, "this is not the end, nor is it the beginning of the end, but it is the end of the beginning."

Chad said...

Did anyone else check that Calculated Risk piece alstry referenced and notice the percentages are for California? You all remember California...one of the five epicenters (along with Nevada, Arizona, Florida, and Michigan) of the housing bubble?

Nothing like cherry-picking to make a point. So how about we take a look at foreclosures in, say, North Dakota?

According to RealtyTrac.com, there are 308,198 households in North Dakota. May 2009 new foreclosure filings totalled a whopping...brace yourselves...23. For those of you scoring at home, that's a little over 7/100 of 1% (0.07) of North Dakota households filing for foreclosure. Or, in other words, 99.93% did NOT file for foreclosure in May.

What about year-to-date new foreclosure filings through May 2009? A mind-blowing, earth-shaking...202. Less than 7/10 of 1% (0.7) of North Dakota households have filed for foreclosure. This means a little over 99.3% of North Dakotans have NOT filed for foreclosure as of May.

OMG! Run for the hills! It's game over time, people! Grab your beans, guns, and ammo and head for your remote Montana cabins!

P.S. I thought alstry said he wasn't going to be posting for a while. Oh, well...that half a day was nice...

Scott Grannis said...

The fact that foreclosures are up in California does not mean the market has not bottomed. Sales volume is up and foreclosures are up, but prices are no longer falling, and have even risen in some markets in recent months. Housing affordability is near a record high, given the significant decline in prices and very low interest rates. Housing starts have been flat this year after falling to extremely low levels. Home builders' stocks have been flat for the past nine months. I see a bottom.

Brian said...

alstry -

Please get a girlfriend, or a puppy, or something. Maybe start your own blog so someone can have a shot at naysaying everything you post...

Oh, wait. You did! Two of them! "Alstrynomics" and "Zombulator".

They list you as the inventor of "Alstrynomics".

Why do I get this feeling that you're a retired college professor?

狂猪 said...

In the areas around San Francisco, the housing price have definitely bottomed. In fact, the price have bounced up a bit from the bottom. I know because I have been house hunting for the last few months.

I suspect other local real estate markets that led the nation are in similar situation.

Also, for some time I was very unsure on the debate of deflation vs. inflation. Now my view is strongly bias toward inflation. I think the deflation threat from deleveraging was very real and therefore I credit the Fed for addressing it forcefully. However, it is too soon for me to decide if the Fed has over did it.

Now the more interesting debate I like to figure out is rather the inflation will be mild and overall beneficial or will we end up with run away inflation.

alstry said...

Star Tribune

July 14, 2009

In another sign that the housing market has yet to hit bottom, window manufacturer Andersen Corp. said Tuesday it will permanently eliminate 250 management and staff positions, more than half of them at its Bayport, Minn., headquarters.

In addition to the job cuts announced Tuesday, Andersen eliminated 287 jobs last week as part of the closing of a vinyl window manufacturing plant in Fall River, Mass., said Maureen McDonough, a spokeswoman.

Tuesday's workforce reduction represents about 10 percent of the company's management and office staff. Those cuts come at a time when 600 production workers who were laid off earlier this year have been recalled as orders have improved slightly.

The management and staff cuts are being made because the company believes its markets won't recover until late 2010 or early 2011, making it necessary to eliminate jobs that aren't directly related to the current volume of window production, McDonough said.

"While we had every hope and intention of riding out this market correction without making adjustments like this, it has become clear that these actions are necessary to protect the company's financial strength and flexibility given the fading prospects for a near-term housing market recovery," Jay Lund, president of the Andersen Window and Door Group, said in a statement.

alstry said...

W.W. Grainger

Sales for the Chicago-based supplier of facilities maintenance products fell 13% to $1.5 billion. Analysts expected earnings of $1.14a share on revenue of $1.5 billion, according to a survey by FactSet Research.

"We have not seen an indication of an economic turnaround at this point but our results indicate that we are gaining market share during this recession," the company said.

Hmmm. Gaining market share and sales DOWN 13%?

If a DEPRESSION is defined as a 10%drop in GDP peak to trough...

We now have Dell and Intel confirming Depression for technology.

We have CSX confirming Depression for transportation and a good barometer for commerce in general.

We have Gannett confirming Depression for media and advertising.

We know new housing and autos are in a MASSIVE depression.

Few are seeing any end to the slump and some a calling for an end to the Recession?

Interesting.

Brian said...

It didn't work, apparently.

I'll just try to regard alstry as an example of the importance of good parenting.

alstry said...

Brian,

I guess we can add in REITS to the DEPRESSION train....

(MarketWatch) -- Although real estate investment trusts have used the recent market recovery to raise capital and reduce financial pressures, the industry still faces significant headwinds, Fitch Ratings warned Wednesday. "Most REITs will need to address tenuous access to financing across the capital markets," said Steven Marks, head of Fitch's REIT group. "REITs are also contending with an unprecedented downturn in property markets, as indicated by increasing tenant defaults and reductions in net operating income."

The DEPRESSION TRAIN......
AIRLINES
AUTOS
ADVERTISING
ARCHITECTS
BUILDERS
CONTRACTORS
TECHNOLOGY
MEDIA
PUBLISHING
TRANSPORTATION
HOTELS
MANUFACTURING
RETAIL
RESTAURANTS

And that is with a collective government spend of over $6.5 Trillion running in excess of a $2 Trillion dollar deficit.

Could you imagine how bad things would be if Obama cut spending?

alstry said...

YUP the recession is over and the DEPRESSION is just beginning...

The rate of capacity utilization for total industry declined in June to 68.0 percent, a level 12.9 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.

The data keeps getting worse and worse. Sales are evaporating. Job losses and wage cuts exploding. Prices rising. Seriously, how bad would things would be if Obama cut spending?

Public Library said...

I think what may be more interesting about the housing market is the credit quality of the next generation home purchasers. Tt seems we have not learnt a thing.

A friend of mine with dubious credit was approved for a $400K FHA loan with only 3% down. He and his wife probably make $150K combined and support a 6 month old child. The payment will be approximately $3,200/mo while they currently rent for about $1,500. He has deliquent credit card debt on top of that.

I am willing to bet many of the loans in the housing market are FHA backed which means we are completing the socialization of housing.

It is pretty common these days for mortgage brokers to push FHA loans because these are the only loans that can get done.

Is this suppose to be a good thing? Another example of a Government distorted marketplace. Be careful what you wish for...

Public Library said...

Here is a great piece about how our Fed truly has no clue what it is/was doing, specifically when the yield curve remained inverted for months on end back in 2005/06 and Bernanke telling bold faced lies to Congress.

http://www.realclearmarkets.com/blog/06%252030%252009%2520-%2520More%2520Power%2520to%2520the%2520Systemic%2520Risk%2520Generator.pdf


"In March 2006, just prior to the deliberate inversion,
Bernanke gave a speech titled “Reflections on the Yield
Curve” to the Economic Club of New York; there he
insisted the result of inversion would be different this time:

If investors expect [economic] weakness to require
policy easing in the medium term, they will mark
down their projected path of future spot interest
rates, lowering far-forward rates and causing the yield
curve to flatten or even to invert. Indeed, historically, the slope
of the yield curve has tended to decline significantly in advance
of recessions . . . What is the relevance of this scenario
for today? Although macroeconomic forecasting is
fraught with hazards, I would not interpret the currently
very flat yield curve as indicating a significant economic slowdown
to come . . .

BERNANKE: I think the yield curve can be inverted
for a considerable period without significant
implications for the economy as a whole, yes. Possible
for some banks, but not for the economy as a
whole.

Six months later (November 8, 2007)
– and just one month before the recession
actually began – Bernanke was
asked by Senator Chuck Schumer (DNY)
about the probability of the U.S.
soon suffering a recession:
SCHUMER: On a scale of 1 to 10,
with 10 being the most likely, how
likely is a recession?
BERNANKE: Economists are extremely
bad at predicting turning
points and we don't pretend to be
any better. We have not calculated
the probability of recession and I
wouldn’t want to offer that today. Again, our assessment
is for slower growth, but positive growth going
in the next year.

Bernanke brazenly lied when he said “we have not calculated
the probability of recession.” The Federal Reserve
Bank of New York maintains a web-site that uses the
long history of the yield curve to assign a probability of
recession a year ahead, and at the time Bernanke testified
in November 2007, that probability was 40%."

Scott Grannis said...

alstry: You're a great bellwether. Always looking in the rear-view mirror. Right in the middle of the consensus. Missing all the changes on the margin in the important fundamentals. If you ever turn bullish I'm going to get nervous.