Wednesday, September 8, 2010

The news is not bad, and that's good

This chart shows new mortgage purchase applications, which have been very weak, but look to have bottomed in July and have increased marginally since. This is not too much to go on, of course, but at the very least it suggests that the weak home sales numbers we've seen of late are not getting worse, and that therefore the housing market is not in freefall as many have been suggesting. The recent weakness may prove to have been a temporary lull. Whatever the case, it also adds to the case that the dreaded double-dip recession is not unfolding.

In other news, today's equity rally seems to have been helped along by news that European banks are not collapsing. This action reaffirms my view that the market has been extremely worried about bad news, and therefore the absence of bad news ends up being a positive. If we end up with any positive news, there will likely be plenty of action to the upside.

Meanwhile, I note that commodity prices continue to be strong, once again confirming the absence of a double-dip, and also confirming the absence of deflation. There are of course many prices that are falling, but just as many or more that are rising. This amounts to a relative price change, not a deflation, and this is normal given the depths of the recent recession.


Benjamin said...

Commodity prices are rising, yet Japan has deflation. How is that?

Ergo, we can have rising global commodity prices and deflation in the USA too, no?

BTW, the housing recovery is way too weak. We are having a Japan-style recovery. This is not good.

BTW, if Boskin is right, and methods of measuring inflation tend to overstate inflation, we are just about at zero inflation or deflation now.

Japan has had zero inflation-deflation for 20 years. The results have baan awful.

Public Library said...

CDS on periphery Europe tell a different story.

- The 10-year Ireland-to-Germany bond spread has risen to 376 bps. This spread is larger than during the financial crisis in May when the spread peaked at 306 bps.

- The 10-year Greece-to-Germany bond spread is now 946 bps, just below the peak level of 963 bps in May.

- The 10-year Portugal-to-Germany bond spread is now 351 bps, just above the peak in May of 349 bps.

Benjamin said...

BTW, bottom left corner front page of WSJ today is a chart US GDP as percent of potential GDP. (yes, some old fogies still read newspapers).

The chart concludes inflation is dead, as we are so far under where we should be.

The Fed is fighting the wrong devil.

John said...


The fact that Europe has a few junk rated sovereign credits is not new news. The market is correctly pricing in the additional risk. Portugal had a large bond is costing them 4%. There are lots of institutions that will lend to these a price.

Greece will probably need to restructure at some point. Maybe Ireland too. But this is going to play out over a long time.

I know you think it gets a lot worse and maybe it will. But maybe it doesn't, too. And since the market has seen this movie before, its going to HAVE to get a lot worse to have a similar effect.

Public Library said...


Interesting how simply things are classified "few junk rated sovereigns" these days as if having 3 or 4 countries on the verge of collapse simultaneously is small potatoes these days.

This is one of the subtle consequences of deficits, debts, and paper money expanding faster than the Universe. We have lost our ability to find rational and meaningful comparisons/analogies.

We are truly in unchartered territory so I am not in the camp of regression to the 'normal distribution' is the future.

Public Library said...
This comment has been removed by the author.
John said...

"The US economy remains almost comatose. The slump aready ranks as the longest stretch of sustained economic weakness since the great depression. The economy is staggering under many 'structural' burdens, as opposed to many 'cyclical' problems. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the banking collapse, the real estate depression, the health care cost explosion, and the runaway federal deficit."

Sound familiar? The above quote comes from Time Magazine in 1991.

Thanks to Jeffrey Saut of Raymond James for the reminder.

Maybe its 'different this time'...and maybe it isn't.

Frozen in the North said...

I agree with John with regards to Europe. Spain is the biggest risk and represents about 10% of Europe's GDP, the rest of the PIGGS are almost inconsequential (less then 5% of GDP when all together).

The only risk for Europe is the amount of sovereign debt held by the banks.

As for housing, you are correct at one point the fall has to stop. However, what is being built are fewer "Mac Mansions" and more (less than 250k) homes. So the # of homes being built doesn't tell the whole story, and there the story continues to deteriorate (in terms of dollars spent in new construction)

Public Library said...


I lived in the UK, Spain is a complete disaster. Spain is actually the big cover-up. Everyone flocked to Spain for their vacation homes by the sea. Spain = California or Florida. Both are a basket case.

Now that the homeowners are underwater and over-levered in a foreign nation, don't expect things to end so merrily.

Not to mention an entirely different approach to culture and work ethic.

Does anyone remember after the train bombings in 2005-ish how quickly the incumbent President, who was well in the lead, got ousted by a landslide?

That is Spain in a nutshell. Kind of reminds me of how the CA Governor came on the scene and look at CA now...

Benjamin said...

As ever. your optimism is nice to hear.

Still, Milton Friedman visited Japan in the late 1990s, and told the central bankers there that the solution to Japan's woes was to print lots of money until the economy got going again.

They didn't listen.

We are not listening now.

Friedman as logically consistent--but not someone addicted to nostrums.

Thatmeans when threatened by inflation, you tigthen up; when threatened by recession and deflation, you gun the presses.

Normally, you go with steady growth, but now is not normal.

Benjamin said...


Ben Bernanke destroys the idea that a loose Fed caused the house bubble--it was a global glut of capital, funneled into US housing markets.

"The high rate of foreign investment in the United States also likely played a role in the housing boom. For many years, the United States has run large trade deficits while some emerging-market economies, notably some Asian nations and some oil producers, have run large trade surpluses. Such a trade pattern is necessarily coupled with financial flows from the surplus to the deficit countries. International investment position statistics show that the excess savings of Asian nations have predominantly been put into U.S. government and agency debt and mortgage-backed securities, which would tend to lower real long-term interest rates, including mortgage rates. In international comparisons, there appears to be a strong connection between house price booms and significant capital inflows, in contrast to the aforementioned weak relationship found between monetary policy and house prices."

bERNANKE 9/2/10

Benjamin said...

You know it is obvious, when even guys at the AEI are hammering the Fed to loosen up monetray policy.

Bernanke in Denial at Jackson Hole
By Desmond Lachman/AEI

August 27, 2010, 2:27 pm Federal Reserve Chairman Ben Bernanke’s Jackson Hole speech today attests to how little he has learnt from the 2008-2009 Great Economic Recession. On the very morning that U.S. gross domestic product growth estimates for the second quarter were revised down to a paltry 1.6 percent, Bernanke grudgingly acknowledges that “the pace of economic recovery in output and employment has slowed somewhat.”

And, seemingly oblivious to the fast-fading economic support from the fiscal stimulus package and inventory cycle, as well as to the major drag on U.S. economic growth from the unemployment and housing foreclosure crises, he assures us that “despite the recent economic slowing, it is reasonable to expect some pick-up in growth in 2011.” This all too sanguine assessment leads him to believe that at present there is no need for further monetary policy easing.

Sadly, Bernanke’s dismissal of any real risk of a double-dip economic recession and of a rise in unemployment to double-digit levels is putting him once again behind the monetary policy curve. As in 2008, he will find again that once he is forced to aggressively resort to quantitative easing by a crumbling domestic economy, it will be too late to have prevented the onset of a new recession.

It will also prove too late to have prevented deflationary forces from taking hold in the U.S. economy. This is all the more the pity since with the U.S. public finances already so compromised, monetary policy is now the only game in town. And Bernanke’s speech today suggests that he is once again in the process of dropping the ball.

Benjamin said...

Again from AEI, about Ron Paul:

Bernanke’s False Dichotomy
By Vincent Reinhart/AEI

February 26, 2010, 3:53 pm In hearings at the House and Senate this week, Federal Reserve Chairman Ben Bernanke showed two rare outbursts of passion (at least as judged by the stoic standard of central bankers). Rep. (R-TX) Ron Paul strung together a conspiracy theory that put Fed funding at the center of the Watergate scandal and the invasion of Iraq. A puzzled Bernanke stung the Texas congressman by calling that allegation “absolutely bizarre.”

I may reconsider my support of Ron Paul. He sounds like a lulu.

John said...


Cash is earning nothing. It is already bidding up utility stocks, (see a chart of XLU), and consumer staples (XLP) is showing steady accumulation. High grade bonds (LQD) has been in an uptrend for many weeks. High yield (HYG) is firmly bid. The double dippers are losing the debate.

I know you are impatient for this to spill into commercial real estate and I sympathize with you. In my cheap opinion time is running out for the bears. I sense the worm is turning. This is going to be resolved with a return of inflation, not deflation. Its slow. Its like watching the hour hand of a clock while cleaning restrooms (I did that in my college days). But the frustration of earning N-O-T-H-I-N-G on cash balances is painful and is and will continue to drive funds into risk assets. I, too feel the impatience you feel, for I believe high quality equities are not valued correctly by Mr. Market. But as we all should know, Mr Market can be fickle. We must be patient to get the prices we feel are fair and appropriate. They will come. For equities AND commercial real estate.

Hang in there.

Benjamin said...


As always, your optimism is a fresh breeze.

But the Fed should stop dithering. The Japan Wing is in charge of the Fed.

Even guys at AEI are calling for Fed action, more QE.

I hope we do not do a Japan. There, central bankers are still pettifogging about the perils of inflation and the need for price stability.

marmico said...

Riding shotgun, the news ain't so bad. Whatever.

It's a great depression not a great recession in new home sales, existing home sales, pending home sales and MBA purchase applications, Grannis.

In the econoblogosphere you ain't the go-to-guy for the housing market. Give it up!

Benjamin said...


You should set aside personal attacks and bring your valid point home: Real estate is in a depression.

The Fed needs some Growth Hawks, not some dithering Japanites.

PS Grannis provides a valuable forum here, and he has valuable insights. I disagree with Grannis on many issues, yet he has never insulted me for merely having a different viewpoint.

Why can't you do the same?

Scott Grannis said...

The level of activity in the real estate sector certainly counts as a depression, but the important thing for an investor is not the level, but the change in the level on the margin. If real estate is bottoming and perhaps slowly turning up, as the data appear to suggest, this is very optimistic news.

John said...

For some further insight I suggest looking at a chart of the real estate exchange traded fund, IYR.

While down some today it is not trading at 'depression' levels. It has retraced almost all of the decline since the April highs. If this ETF breaks up and out over those highs in the coming weeks its going to be more difficult for the bears to argue their depression mantras.