InvestorCentric

US Housing Market Bottom Not Panacea

2012-02-02T08:48:00.000-08:00

Many real estate forecasters tend to speak about the arrival of a bottom in the U.S. housing market as an answer to everyone’s woes, but a look to the past shows that may not be the case. Analyst Tim Iacono references economists Robert Shiller and Barry Ritholtz in a discussion about the dip in Los Angeles home prices in 1996. He notes that prices stayed low for four years following the dive, suggesting that any bottom that may come in 2012 will likely not be the answer everyone hopes it will be – at least in the near term. For more on this continue reading the following article from Tim Iacono.

Not surprisingly, I’m going to have to agree with both Yale Economist Robert Shiller in this Business Insider interview and Barry Ritholtz at his Big Picture blog in arguing that a housing bottom – if it does indeed arrive in 2012 – will prove disappointing for those expecting gains on their real estate investment in 2013 or 2014.

We happened to be living in Southern California at the time and had the good fortune to buy a house there in 1995, though, we were just looking for a place to live, not thinking of it as an investment.

I remember the price actually declined by another five percent or so in the year after we bought it and it wasn’t until five or six years later that we began to hear about rising home prices, a bit surprised to learn that the value of our place had increased by $100,000 or more.

But, for the first few years, you were better off not even thinking about home values.

Using the broad Los Angeles price index as an example, even if you had bought at the absolute bottom in February 1996, you’d have had less than a one percent gain a year later.

The index spent a full four years within five percent of the February 1996 low!

Anyone thinking that a housing market bottom in 2012 means that home prices will be higher next year or the year after that will probably be disappointed.

Moreover, given the size of the recent boom and the likelihood of the bust being of similar magnitude, I wouldn’t be surprised if home prices don’t post a substantive advance for the rest of the decade.

This blog post was republished with permission from Tim Iacono.

It's Time To Drop Those Money Funds

2012-01-30T11:33:00.000-08:00

If you are still invested in money funds, Bernanke's announcement that the Fed plans on keeping interest rates the same for the foreseeable future should help spur you into action. With returns near 0%, if you keep money in a money fund, you are simply losing buying power everyday to inflation. Tim Iacono from The Mess That Greenspan Made, takes a closer look at money fund investments in his blog post below.

More fallout from last week’s Fed announcement of a one-and-a-half year extension to their freakishly low interest rate forecast comes via this MarketWatch story about the dim prospects of money market returns between now and sometime in 2015 (or later).

Money funds are designed to be ultra-safe cash-equivalents, and traditionally they provided a bit more return than bank certificates of deposit or savings accounts.

But for about 18 months now, nearly two-thirds of all money funds have yielded under 0.01%. To see just how horrible that is, consider that if you had $1,000 and split it evenly between a money fund and a piggy bank, at the end of a year the fund would only be ahead by a nickel.

This is not a new problem, but the Fed paints it in a new light. Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take a bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising.

Even when rates rise, money-fund yields aren’t likely to go up. Financial-services firms have been waiving costs, basically operating them at a loss to keep assets in-house; many smaller firms have simply shuttered their money-market funds. When rates finally do go up — and the Fed forecast doesn’t mean it can’t happen, it just suggests that it won’t until 2014 — firms will first take much of any increase for themselves.

By the way, does anyone know how stable value funds are doing these days? I was tempted to not convert one of our 401ks to a self-directed IRA when we left our cubicle jobs back in 2007 in order to get the 3 or 4 percent these funds paid in the event that the early-decade low rate environment returned which, as it turns out, it did with a vengeance.

I regret that decision a little more each year…

This post was republished with permission from Tim Iacono.

Fed Economists Laugh It Off

2012-01-23T09:29:00.000-08:00

A new graph is making its way around the Internet that charts the amount of laughter recorded by Federal Open Market Committee (FOMC) stenographers during meetings between 2001 and 2006 – during the ramp-up to the recession. The graph shows that committee members had increasingly more fun as the years passed, and suggests they could have been doing more to keep an eye on the growing housing bubble that would soon burst. The FOMC is expected to announce a new initiative regarding interest-rate projections and future impact, and many are wondering how many will be laughing. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve transcripts from 2006 released ten days ago continue to reverberate around the internet as the central bank has become a laughing stock for being so unaware of the U.S. housing bubble that was inflating to dangerous levels throughout the year.

Dean Baker’s Alan Greenspan’s ship of fools from last week is well worth reading if for no other reason than to learn what former Fed governor Frederic Mishkin was thinking late that year and I recently came across this item at The Daily Staghunt blog that charted how much laughter appeared in the transcripts over the years.

While Fed economists are purportedly a funny lot, it does look pretty bad to see increasing joviality at a time when they could have been doing something about the housing bubble.

The FOMC (Federal Open Market Committee) meets this week and they are expected to announce of a new communication initiative with two key features – expanded interest-rate projections and an explanation of their objectives for inflation and employment. Fed Chairman Ben Bernanke will surely discuss these in detail in the press conference after the meeting and, though normally keen on audience engagement, he’ll probably be hoping that he’s not asked about the 2006 transcripts.

If we’re really lucky, someone will ask him about this chart.

This blog post was republished with permission from Tim Iacono.

Stiglitz Forecasts Financial Doom, Gloom

2012-01-13T10:20:00.000-08:00

Columbia University professor and Nobel laureate Joseph Stiglitz is not optimistic about the prospect of the American Dream as the country moves into 2012. Stiglitz waxes philosophical about the country’s growing wage gap, terminal unemployment and financial crises that have erupted in multiple areas of the world. He opines that working on long-term problems like fiscal debt could actually solve short-term problems like unemployment if the world’s power players were not rooted in politics as usual. The fear, Stiglitz says, is that the system will cataclysmically right itself before cooler heads prevail. For more on this continue reading the following article from Economist’s View.

I think it would be fair to say that Joe Stiglitz isn't predicting a return to general prosperity anytime soon:

The Perils of 2012, by Joseph E. Stiglitz, Commentary, Project Syndicate: The year 2011 will be remembered as the time when many ever-optimistic Americans began to give up hope. President John F. Kennedy once said that a rising tide lifts all boats. But now, in the receding tide, Americans are beginning to see not only that those with taller masts had been lifted far higher, but also that many of the smaller boats had been dashed to pieces in their wake.

In that brief moment when the rising tide was indeed rising, millions of people believed that they might have a fair chance of realizing the “American Dream.” Now those dreams, too, are receding. ...

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems. ...

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. ...

I'm not sure it was intended as a joke, but this part made me laugh: "It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs..."

This article was republished with permission from Economist's View.

Fed Backs Conversion of Foreclosures into Rentals

2012-01-06T09:31:00.000-08:00

The Federal Reserve’s latest report on the U.S. housing market indicates its advocacy for the bundling and selling of government-owned foreclosed homes to investors who can then convert the homes into rental properties. The report notes that the market is not expected to improve and that interest in rentals will continue to increase, thereby opening the door to a government investment opportunity. Some critics believe, however, that the ulterior motive here is to neutralize an area (rental costs) that accounts the for the Fed’s “core” inflation rate by placing more rentals on the market, thereby providing more room to print money in the event of a new fiscal emergency. For more on this continue reading the following article from Tim Iacono.

The Federal Reserve’s new white paper about the U.S. housing market released just yesterday – The U.S. Housing Market: Current Conditions and Policy Considerations (.pdf) – contains the following paragraph and a good deal of supporting rationale for their recommendation to sell GSE-owned foreclosed properties in bulk to investors so that they can be converted in bulk into rentals.

The price signals in the owner-occupied and rental housing markets–that is, the decline in house prices and the rise in rents–suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

While, on the surface, this makes a good deal of sense after the nation painfully learned a few years ago that home ownership wasn’t what it was cracked up to be and, ever since, home prices have been falling while demand for rental properties has grown, a massive conversion of REO properties into rental properties would also have the convenient side effect of helping the Fed keep inflation low, giving it more leeway to print up another trillion dollars or so for the greater good, should the need arise.

How so?

Recall that, part of the reason that the housing bubble grew so big was that the inflation statistics include rental prices as a proxy for the cost of home ownership, a change that was made all the way back in 1983 and that forever changed how inflation is reported and how high home prices could rise (see this Seeking Alpha article on the subject from a few years back that still ranks quite high on a search of “owners’ equivalent rent”).

After years of being subdued because everyone wanted to own a home (and nearly did), lately, rents have been rising – up about 2 percent over the last year – and, since rents account for 40 percent of the Fed’s “core” inflation rate, you can see why lower rental prices might be in the central bank’s interest.

This blog post was republished with permission from Tim Iacono.

Farmland Values Soar in Heartland

2012-01-04T10:22:00.000-08:00

Tim Iacono comments on a Brian Williams news segment detailing the rising prices of farmland across America’s heartland, particularly in Iowa, where Republican presidential candidates so recently debated. Prices in the area have risen more than 30% in Iowa and 25% on average throughout the Midwest. One land auction featured in the report resulted in a sale for more than $13,000 per acre – more than double the value from five years ago. Experts say the increases are driven by the rarity with which farmland comes on the market and the growing demand for agricultural products, particularly corn for the surging (and subsidized) ethanol market. For more on this continue reading the following article from Tim Iacono.

After today, we won’t be hearing much about Iowa anymore as aspiring presidential candidates pack up and leave town following today’s caucuses, but, this NBC report on the farmland boom there puts things in a slightly different perspective than you may have heard after listening to talking heads on MSNBC and Fox News for the last few months.

Visit msnbc.com for breaking news, world news, and news about the economy

There are some pretty impressive statistics associated with the boom – per acre prices in Iowa up over 30 percent from last year and, across the entire Midwest, up about 25 percent … and you thought the real estate bubble was over.

This blog post was republished with permission from Tim Iacono.

China Showing Signs of Economic Weakness

2011-12-20T08:13:00.000-08:00

Economist Paul Krugman takes an unflinching look at China’s current economic position, and believes what he sees is a mirror image of Japan in the 80s or the U.S. in 2007: a country that has relied on shady banking practices to sustain a boom in growth that now cannot be supported by domestic consumption or financing. Now, as the bubble is set to burst, the country seems ready to dig in its heels, particularly by issuing punitive tariffs on foreign trade partners. Krugman rightly notes that the last thing the global economy needs is another crisis point, but he also believes that is the direction in which the country is headed. For more on this continue reading the following article from Economist’s View.

Uh-oh?:

Will China Break?, by Paul Krugman, Commentary, NY Times: Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now. ...

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, us:... China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. ...

And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system..: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world? ...

For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing. ...

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

This blog post was republished with permission from Economist's View.

Eurozone Crisis Overshadows U.S. Debt Concerns

2011-12-15T07:48:00.000-08:00

The U.S. media and market analysts have been focusing so much attention on the Eurozone debt crisis that similar problems brewing at home in domestic credit markets are not getting any attention, say some critics. Now that the presidential election is in full swing, many argue that the growing U.S. debt debacle will go unattended as politicians focus all their time and energy on staying in – or getting into – office. With the Federal Reserve’s latest announcement that Treasury borrowing rates will remain at historical lows, it appears that policymakers are intent on letting the problem fester rather than making the tough decisions that represent sound fiscal sense. For more on this continue reading the following article from Tim Iacono.

Former Kansas governor Mark Parkinson appeared on CNBC yesterday and made the point that you don’t hear too much anymore these days with European credit markets being such a mess – that the U.S. will someday have a similar crisis.

Unfortunately, with the election season now well underway, officials in Washington are not likely to take any action to make the looming U.S. debt crisis any less menacing, in fact, with borrowing rates so low for the Treasury Department, you get the feeling that we’re whistling past the graveyard louder than ever.

This blog post was republished with permission from Tim Iacono.

Consumer Credit Trends Shifting

2011-12-12T08:21:00.000-08:00

Tim Iacono reviews data compiled on EconomPicData that reveals American consumers are ratcheting down their use of credit cards, dropping toward 15% of personal income. Consumer debt has been rising for decades, but now it is being replaced by student loan debt, which has increased dramatically in the last 10 years to approach 5% of personal income. Iacono believes this will likely cause problems in the long term as getting an education begins to look less appealing and eventually impacts U.S. competitiveness in the global market. For more on this continue reading the following article from Tim Iacono.

From this item at Jake’s EconomPicData blog the other day comes the graphic below depicting dramatic changes in consumer credit trends over the years. Racking up revolving credit (e.g., credit cards) is not nearly as popular as it was for decades, what I’ve long called “the real Reagan Revolution” as individuals dramatically increased their use of credit cards to fuel consumption (i.e., buying things you don’t need with money you don’t have).

Taking up the slack for falling credit card balances are higher student loan balances that, already, are further separating the nation into have and have-nots (a.k.a. debt serfs) while making the whole idea of higher education less appealing when this is one the the things the country needs most to remain competitive with emerging economies in Asia.

This blog post was republished with permission from Tim Iacono.

Eurozone Eyes Questionable Bailout Strategy

2011-12-07T08:01:00.000-08:00

Talks in the Eurozone turn on who is going to accept the loss in a debt restructuring deal, and now architects of the plan are saying private-sector bondholders may not have to take a haircut in the event of a bailout. The news has fueled a short-term rally, but experts criticize the measure as one that will result in the same kind of catastrophe that befell Ireland when it granted banks a blanket bailout that pushed the debt onto Irish citizens and resulted in a staggering collapse of the economy. As European countries scramble to guarantee one another’s debt and lenders seek to avoid paying for bad decisions, ratings agencies are poised to downgrade the entire region. For more on this continue reading the following article from Economist’s View.

Felix Salmon:

The eurozone’s terrible mistake, by Felix Salmon: The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague...

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? ...

On Ireland, see: Despite Praise for Its Austerity, Ireland and Its People Are Being Battered.

This article was republished with permission from Economist's View.

Ron Paul Talks Gold Standard

2011-12-01T09:00:00.000-08:00

Presidential candidate Rep. Ron Paul (R-TX) spoke with Judge Andrew Napolitano, host of FOX Business News “Freedom Watch”, about his belief in the gold standard and the current state of U.S. monetary policy. Paul discusses the transition from fiat currency back to the gold standard by legalizing gold and silver tender without having a fixed exchange rate between the two currencies. Judge Napolitano questions whether there is a possibility of a true gold standard that allows exchange between the two, and Paul responds that while that scenario is a long way off, the current system cannot sustain itself and that an audit of the Federal Reserve is a good place to begin reform. For more on this continue reading the following article from Tim Iacono.

Rep. Ron Paul (R-TX) appeared on Fox Business News yesterday to talk about the nation’s money and a return to the gold standard in the unlikely event that he’s elected president.

His discussion of the U.S. dollar throughout American history reminded me of a Wall Street Journal book review yesterday by James Grant that, from what I could tell, was a lot better than the book – Greenback Planet by H.W. Brands. From the book review:

“Greenback Planet” is the story of this amazing monetary transformation. The narrative begins in the 18th century and races to the present, pausing to catch its breath at some of the great American monetary landmarks: Andrew Jackson’s veto, in 1832, of legislation rechartering a predecessor to the Federal Reserve; Abraham Lincoln’s recourse to greenbacks, or fiat currency, to finance the Civil War; resumption of the gold standard in 1879, with which it once more became possible to exchange gold for paper and vice-versa at a fixed and statutory rate; J.P. Morgan quelling the Panic of 1907; the Federal Reserve not quelling, never mind preventing, the Great Depression; the crazy-quilt monetary improvisations of the 1930s; the halfway gold dollar of the post-World War II era; and the creation, in 1971, of the pure paper (later digital) model of today.

Mr. Brands is a paper-money man, though the subtitle of his book—”How the Dollar Conquered the World and Threatened Civilization as We Know It”—seems to betray some reservations.

This blog post was republished with permission from Tim Iacono.

Economist Recommends Tax Increases

2011-11-29T08:34:00.000-08:00

Economist Paul Krugman writes in The New York Times that it’s a good thing the Congressional “supercommittee” has failed to agree on federal budget cuts. A more helpful approach, he says, is to raise taxes on the rich and to start taxing financial transactions. He takes on naysayers who argue taxing the rich will not help the bigger picture by pointing out that the combined income for the top 0.1% of earners is more than $1 trillion, and claims the vast increase in financial transactions over the years could result in a significant source of tax revenue. For more on this continue reading the following article from Economist’s View.

Increased in revenue from taxes on very high incomes and taxes on financial transactions should be part of the long-term deficit reduction plan:

Things to Tax, by Paul Krugman, Commentary, NY Times: The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. ... The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest...: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich ... should pay more in taxes. I got many responses from readers ... that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. ... The IRS reports that in 2007 ... the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and ... taxes ... would raise a significant amount of revenue...

For example,... before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. ... I’ve extrapolated ... using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. ...

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions... Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything,... to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing. ...

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

This blog post was republished with permission from Economist’s View.

Ron Paul ‘Faces Nation’

2011-11-22T06:56:00.000-08:00

Ron Paul recently fielded questions from Bob Schieffer on Face the Nation, and critics of the interview point out mainstream media’s tendency to put words in Paul’s mouth and otherwise find ways to undermine the GOP candidate’s message. Schieffer questioned Paul on his stance on U.S. foreign policy and military presence, Iranian nuclear proliferation, and the closing of several government agencies. Paul explained and defended his position despite Schieffer’s clearly argumentative approach, demonstrating why Iowa numbers have placed him in the running with contenders Mitt Romney and Herman Cain. For more on this continue reading the following article from Tim Iacono.

GOP hopeful Rep. Ron Paul (R-TX) appeared on Face the Nation yesterday and host Bob Schieffer provided a very compelling display of how, for the most part, the mainstream media works against any fundamental reform for the U.S. government as Schieffer seems to only be interested in putting words in Paul’s mouth that, fortunately, are rejected.

Some media-watchers have called this a hit-job after Paul had risen to a statistical tie for the lead in some Iowa polls and it’s hard not to come away with that impression when you examine Shieffer’s words closely, as was done by Paul Mulshine of the New Jersey Star Ledger in the article No wonder these talking heads don’t like talking to Ron Paul.

This blog post was republished with permission from Tim Iacono.

Fed Fends Off Negative Interest

2011-11-18T07:05:00.000-08:00

Some economists wonder why the Federal Reserve does not lower its current interest rate on reserve holdings from 0.25% to zero, thereby possibly encouraging banks to ease lending restrictions rather than hold on to currency. One answer is that the Fed fears interest slipping into negative territory, which could eliminate banks’ incentive to borrow funds from various markets and keep interest positive. Negative interest, which incentivizes dumping cash now that won’t be worth as much in the future, could cause disruptions in treasury auctions, money market mutual funds and federal funds that are not designed to weather negative interest. For more on this continue reading the following article from Economist’s View.

I've been wondering why the Fed hasn't lowered the interest it pays on bank reserves from its current value of .25 percent to zero. It probably wouldn't do much, but it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy, so why not give it a try? In addition, unlike some other policies the Fed might pursue, this would be easily reversible, and it would help to convince critics that the Fed is trying everything it can think of.

Though it's buried deep within the post, the NY Fed explains the FOMC's reluctance to pursue this option. The argument is that it's possible for some interest rates to go slightly negative, and if they do it will cause various problems the Fed would rather avoid (see below). Since banks can borrow from anyone charging less than the rate they earn on reserves and arbitrage the difference away, paying interest on reserves puts a floor on interest rates. Here's the full argument:

Why Is There a “Zero Lower Bound” on Interest Rates?, by Todd Keister, Liberty Street: Economists often talk about nominal interest rates having a “zero lower bound,” meaning they should not be expected to fall below zero. While there have been episodes—both historical and recent—in which some market interest rates became negative, these episodes have been fairly isolated. In this post, I explain why negative interest rates are possible in principle, but rare in practice. Financial markets are generally designed to operate under positive interest rates, and might experience significant disruptions if rates became negative. To avoid such disruptions, policymakers tend to keep short-term interest rates above zero even when trying to loosen monetary policy in other dimensions. These policy choices are the source of the zero lower bound.

The standard description of the zero lower bound begins with the observation that the nominal interest rate offered by currency is always zero: If I hold on to a dollar bill, I’ll still have one dollar tomorrow, next week, or next year. If I invest money at an interest rate of -2 percent, in contrast, one dollar of saving today would become only ninety-eight cents a year from now. Because everyone has the option to hold currency, the argument goes, no one would be willing to hold some other asset or investment that offers a negative interest rate.

This argument is only part of the story, however. Safeguarding and transacting with large quantities of currency is costly. One only needs to imagine the risk and hassle of making all transactions in cash—paying the rent or mortgage, utility bills, etc.—to appreciate the safety and convenience of a checking account. Many individuals would likely be willing to keep funds in deposit accounts even if these accounts pay a negative interest rate or charge maintenance fees that make their effective interest rate negative.

Large institutional investors are in a similar situation. They use a variety of short-term investments, such as lending funds in the “repo” (repurchase agreement) market and holding short-term Treasury bills, in much the same way individuals use checking accounts. These investments will remain attractive to large investors even at negative interest rates because of the security and convenience they offer relative to dealing in currency. Some repo rates did in fact become negative in 2003 (see this New York Fed study) and again more recently (see Bloomberg). Interest rates in the secondary market for Treasury bills have also been slightly negative recently (see Businessweek).

In other words, market interest rates can move somewhat below zero without triggering a massive switch into currency. Nevertheless, central banks typically maintain positive short-term interest rates even while using less conventional tools (such as large-scale asset purchases) to provide additional monetary stimulus.

The Federal Reserve, for example, currently pays an interest rate of 0.25 percent on the reserve balances that banks hold on deposit at the Fed. The ability to earn this interest gives banks an incentive to borrow funds in a range of markets (including the interbank market and the repo market) and thus has the effect of keeping market interest rates positive most of the time. The Federal Open Market Committee (FOMC) discussed the idea of reducing the interest on reserves (IOR) rate at its September meeting, but no action was taken. Reducing this rate would tend to lower short-term market interest rates and might push some rates below zero. The minutes from the meeting report that “many participants voiced concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit, and that the magnitude of such effects would be difficult to predict.”

Similarly, the Monetary Policy Committee (MPC) of the Bank of England discussed the possibility of lowering the official Bank Rate below 0.5 percent at its September meeting, but decided against doing so. The MPC had previously expressed concern that “a sustained period of very low interest rates would impair the functioning of money markets.”

Some examples of areas where disruptions could potentially arise in U.S. financial markets are:

Money market mutual funds: Money market funds operate under rules that make it difficult for them to pay negative interest rates to their investors, either directly or by assessing fees. Many of these funds would likely close down if the interest rates they earn on their assets were to fall to zero or below, possibly disrupting the flow of credit to some borrowers.
Treasury auctions: The auction process for new U.S. Treasury securities does not currently permit participants to submit bids associated with negative interest rates. If market interest rates become negative, new Treasury securities would be issued with a zero interest rate—effectively a below-market price—and bids would be rationed if demand exceeds supply. Such rationing, which has occurred in recent auctions, would generate an incentive for auction participants to bid for more than their true demand, leading to even more rationing. This situation could generate market volatility, as unexpected changes in the amount of rationing in each auction could leave some investors holding either many more or many fewer securities than they desire.
Federal funds: A decrease in the IOR rate would also likely affect the federal funds market, where banks and certain other institutions lend funds to each other overnight. A lower IOR rate would give banks less incentive to borrow in this market, which would likely decrease the amount of activity. When less activity takes place, the market interest rate will be influenced more by idiosyncratic factors, making it a less reliable indicator of current conditions. This decoupling of the federal funds rate from financial conditions could complicate communications for the FOMC, which operates monetary policy in part by setting a target for this rate.

These examples demonstrate that many current institutional arrangements were not designed with near-zero or negative interest rates in mind. In principle, these arrangements—such as the rules governing mutual funds and Treasury auctions—could be changed. The implementation of a “fails charge” in 2009 for the settlement of Treasury securities (see this New York Fed study) is one example of an institutional adaptation that allows markets to function better at very low interest rates. (A similar charge is scheduled to take effect in some mortgage-related markets in February 2012.) In practice, however, such changes may take significant time to implement and could simply move disruptions to other markets.

Given the markets’ limited experience with very low interest rates, it is difficult to predict with any degree of certainty how they will react to them. If the types of disruptions described above turn out to be significant, taking steps to lower short-term interest rates could actually make financial conditions tighter rather than looser and thus hinder the economic recovery. To avoid this outcome, policymakers tend to choose policies that keep market interest rates positive. In other words, the potential for negative interest rates to disrupt financial markets limits the extent to which policymakers can stimulate economic activity by lowering interest rates. This limit is known as the zero lower bound.

This article was republished with permission from Economist's View.

Obama Seeks Chinese Currency Changes

2011-11-15T07:39:00.000-08:00

President Barack Obama addressed China’s role in the global economy during the Asia-Pacific Economic Cooperation summit in Hawaii. The president urged Chinese policymakers to allow the country’s currency to appreciate at a faster pace so as to rebalance mutual benefits in trade and industrial contracting between China and other countries. Chinese president Hu Jintao argued, however, that China had no significant part in crafting global economic policy and felt little need to abide by its rules, and intimated he hoped his country would have a larger role in shaping policy moving forward. For more on this continue reading the following article from Tim Iacono.

You’d think that there’s at least a little bit of a “Good Cop, Bad Cop” dynamic going on right now when President Obama talks to the Chinese about letting their currency strengthen at a faster pace. Of course, Obama is the good cop here with just about every GOP presidential hopeful playing the alternate role and one can easily imagine Chinese President Hu Jintao being told over the weekend, “Hey, I’m about the best friend you’re ever going to have in Washington. How about a little appreciation, currency-wise?”

As Hu made clear yesterday, from the perspective of the Chinese, they had no part in making any of the rules in the current global monetary system and feel little compulsion to play by them. Mindful of the Japan experience in the late-1980s when strong currency appreciation led to massive asset bubbles and two lost decades, they’re not likely to simply comply with the wishes of the West when it comes to their currency.

This blog post was republished with permission from Tim Iacono.

October Jobs Report Shows Slight Improvement

2011-11-08T06:43:00.000-08:00

Unemployment and underemployment are down and payrolls are up, according to the latest report from the U.S. Department of Labor. Unemployment dropped .1% to 9.0% for the month; however, the number of unemployed hasn’t strayed more than two percentage points from this level in seven months. Despite improvement, the numbers are not as high as predicted and are still far too low considering population growth. While private-sector payrolls are up construction and government payrolls saw an overall decline, which does not bolster predictions of economic recovery. For more on this continue reading the following article from Tim Iacono.

The Labor Department reported that nonfarm payrolls increased by 80,000 in October after an upwardly revised gain of 104,000 in August and 158,000 in September as the jobless rate fell from 9.1 percent to 9.0 percent.

While the October payrolls gain came in slightly below consensus estimates, total upward revisions of 102,000 for the prior two months helped to offset this disappointment, however, the U.S. labor market continues to add jobs at a pace that is failing to keep up with the growth in the population, payroll gains averaging just 90,000 over the last six months and 123,000 so far this year.

The unemployment rate was little changed last month and has now stayed within a narrow range of between 9.0 percent and 9.2 percent for the last seven months. The number of unemployed persons fell from 14.0 million in September to 13.9 million in October while the number of long-term unemployed fell by 366,000 to 5.9 million, or 42.4 percent of total unemployment.

The broader U6 measure of underemployment (including discouraged workers and those settling for part-time work instead of full-time work) fell from 16.5 percent to 16.2 percent and the civilian labor force participation rate was steady at 64.2 percent.

Private sector payrolls increased by 104,000 in October paced by gains of 35,000 in trade, transportation, & utilities and 32,000 for professional & business services, almost half of which were new temporary positions. Education & health care services added 28,000 jobs and there were 22,000 new positions in leisure & hospitality.

Some 20,000 fewer jobs at the state level paced an overall decline of 24,000 in government payrolls and a net reduction of 22,500 in nonresidential construction jobs drove the construction category sharply lower.

Overall, this report is consistent with the recent “slow growth” performance of the U.S. economy where economic activity is, basically, just keeping pace with population growth but nothing more.

This blog post was republished with permission from Tim Iacono.

Eurozone Debt Deal Falters

2011-11-02T08:57:00.000-07:00

Economist Tim Duy discusses the weaknesses in the debt deal designed to save the Eurozone, and explains why it was destined to fail. It appears Greek leaders were never comfortable with the parameters of the agreement formed by other European politicians last week, and holders of Greek bonds even less so. It appears bondholders are not as willing to take a 50% loss on investment as once though, and now Spain is showing further signs of weakness as its GDP grinds to a halt. Duy speculates that deal details that were expected to take a few months to iron out will now take much longer while the Eurozone sinks deeper into debt and the U.S. teeters on the edge of another full-blown recession. For more on this continue reading the following article from Economist’s View.

Tim Duy:

Did The European Deal Just Collapse?, by Tim Duy: To be sure, I have been bearish on Europe. From last week:

I remain something of a Euroskeptic at this point. At best, I think the Europeans will be kicking the can down the road for a few months.

It turns out a "few months" might have been wildly optimistic. It was quickly evident that bond markets didn't show the same enthusiasm equity markets expressed for the supposed deal. That was huge red flag. The second red flag was the Bank of Spain announcing a stagnant 3Q GDP. From the Associated Press:

The Bank of Spain suggested that the flat growth calls into question the government's goal of reducing its deficit to 6 percent of GDP in 2011, from 9.2 percent last year...

...It said domestic demand fell because of lower government spending as a result of deficit-reducing austerity measures taken by regional governments and because of a moribund real estate market. Household and business spending posted small increases. Spain's economic woes stem largely from the collapse of a property bubble.

The Bank of Spain said there is still time to meet the deficit reduction target by the year's end but warned that fresh measures may be necessary.

Yes, you read that right...the Bank of Spain blamed missing deficit reduction targets on fiscal austerity and then suggests additional fiscal austerity as the solution. And as all nations in the Eurozone increasingly pursue fiscal austerity, we can only expect the nascent European recession to deepen. Eventually, the European public will have had enough of the downward spiral. How long will it be before Spain decides to aggressively push for a Greece solution of "voluntary" debt relief?

Finally, a lynchpin in the European debt deal - Greece - apparently isn't ready to abide by the terms of that deal. The public pressure is now too much. From the Financial Times:

Greece’s prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a European Union summit...

...One senior EU official told the Financial Times that Mr Papandreou had appeared reticent about the components of the bail-out package during talks at last week’s summit of EU presidents and prime ministers but no one was prepared for the referendum announcement that came “like a bolt out of the blue...

...The vote would probably be held in January, when Greek bondholders were expected to sign up for a voluntary 50 per cent haircut being negotiated with the International Institute of Finance, wrapping up the new bail-out package. One Athens banker said: “This is a worrying decision by the prime minister. It could derail the whole process even before it’s properly started.”

Not only are the details of the grand European plan still in flux, but so are the broad brushstrokes! Clearly, the Greeks have just brought back into play all the uncertainty last week's summit was meant to dispel. It is not unreasonable to think the Greek electorate is more willing to technically default and start from scratch than their leaders. Indeed, shouldn't this be our baseline scenario?

Bottom Line: Last week's European Summit accomplished far less than even the reduced expectations going into last week. The cracks began appearing before the ink was dry. More worrisome is that the Greek leadership didn't even believe they were on board in the first place. Simply put, the world economy is no less fragile than it was a week ago. And in that fragility still lies the recession risk for a still struggling US economy.

This blog post was republished with permission from Economist's View.

Fed Oblivious to Market Reality, Says Critic

2011-10-31T09:15:00.000-07:00

Market observer Tim Iacono opines on the meeting minutes released for September’s Federal Open Market Committee, wherein members concluded home prices in the U.S. were not falling and that consumer spending looked healthy. Iacono pulls directly from the minutes to discuss where these ideas may have originated for committee members, and recalls the last time the Federal Reserve was caught unawares by the bursting housing and credit bubbles in 2006. For more on this continue reading the following article from Tim Iacono.

[It's not surprising to read about how ill-prepared the Federal Reserve was back in late-2006 for the aftermath of the bursting of the housing and credit bubbles that, by that time, wasn't much they could do about even if they wanted to. In this item from October 12th, 2006, the Fed meeting minutes noted that "considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector" as central bank policy makers were the proverbial lambs being led to slaughter (along with millions of homeowners).]

ooo

Yesterday’s release of the Minutes of the Federal Open Market Committee from last month’s Fed policy meeting showed continuing concern over rising prices, members indicating a “substantial risk” that inflation may not decline with a slowing economy.

Members were also concerned about housing, though apparently they’re falling a little behind in their reading.

In their discussion of major sectors of the economy, meeting participants focused especially on developments in the housing market. Although the situation varied somewhat across the nation, housing activity was continuing to contract in most regions. Home sales had slowed considerably, and anecdotal reports suggested that more buyers were canceling contracts for purchases. Participants noted that inventories of unsold homes had climbed sharply in many areas and that builders were taking a number of measures to reduce inventories. Both permits for new construction and housing starts had declined significantly. Available measures of home prices suggested that appreciation had slowed considerably but prices in most areas were not falling, although some sellers were reported to be providing various inducements to potential purchasers that reduced effective prices.

Apparently they haven’t seen last month’s report from the National Association of Realtors where both new and existing home prices have fallen from year ago levels – it was in many of the papers. It’s plain to see in the chart from Northern Trust.

If they’re waiting for the third quarter report from the OFHEO (Office of Federal Housing Enterprise Oversight), they’ll have to wait another two months. The December report will include a highly anticipated data set as it reflects resale prices of existing homes as well as assessed values for refinancings. This report is generally deemed the most reliable measure of home prices and the December publication could be a doozy.

No one seemed overly concerned about consumer spending – the lynchpin of our modern economy. Maybe they should be. The buoyant effects of increasing household wealth due to rising home prices may be short-lived – not likely to be offset by more jobs and higher wages anytime soon.

In fact, you have to wonder what they’re referring to in the first bold, italicized passage below. Lackluster job creation and a fraction of a percent gain in real wages can’t be driving consumer spending – it’s still all about home equity and easy credit.

Thus far, the drop in housing market activity appeared not to have spilled over significantly to other sectors of the economy. Indeed, consumer expenditures appeared to have been expanding moderately over the previous few months, buoyed by increases in employment, personal income, and household wealth. Contacts in some Districts reported that retail sales had picked up a little most recently. Meeting participants noted that consumer spending going forward would be supported by the higher levels of personal income indicated by recent revisions to the national income and product accounts, by further gains in employment, and by the decline in consumer energy prices over recent months. However, considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector and the degree to which the slowing in housing activity and the deceleration in home prices would affect consumption and other expenditures going forward.

This is going to be a long slow process – opinions about something as dear as real estate are slow to change. This is painfully obvious when reviewing a recent survey in Barron’s where it is learned that more than 90 percent of the people surveyed still think that home prices only go in one direction – up.

More than three-fourths of those polled saw their home’s value rising over the next few years. More importantly, almost half believe the gain will be more than five percent per year and almost a third believe future gains will top ten percent annually.

Inflation Central

On inflation, there was near consensus that vigilance is still needed. Efforts to tame the cost of owners’ equivalent rent have met with some success – it’s too bad this is a cost that no one pays. In the view of the assembled board, there is clearly more work to do.

Many meeting participants emphasized that they continued to be quite concerned about the outlook for inflation. Recent rates of core inflation, if they persisted, were seen as higher than consistent with price stability, and participants underscored the importance of ensuring a moderation in inflation. To be sure, very recent data on inflation suggested some improvement from the situation in the late spring, partly reflecting slower increases in owners’ equivalent rent. Also, the considerably lower level of energy prices of recent weeks, if sustained, would help reduce overall inflation and damp increases in core prices.

Moreover, businesses would meet more resistance to attempts to pass through cost increases in the less robust economic circumstances that were likely to prevail at least for a time. However, energy prices remained quite sensitive to a wide range of forces, including geopolitical developments, and might well rebound. To date, the available evidence indicated that inflation expectations remained contained–indeed, expectations of price increases for the next few years had fallen some as energy prices declined. Nonetheless, several participants worried that inflation expectations could rise and the Federal Reserve’s willingness to carry through on its intention to seek price stability could be called into question if cost and price pressures mounted or even if there was no moderation in core inflation. Looking forward, most participants thought that the most likely outcome was a reduction in inflation pressures, but the anticipated decline was only gradual and the uncertainties around that forecast were skewed toward higher rather than lower inflation rates.

Still wondering how poll respondents can assess future inflation based on anything other than what they see at the gas pump each week, the thought of the Fed’s inflation fighting resolve being called into question if the public doesn’t see core inflation recede – well, that’s just silly.

The decision to hold rates steady in September was easier than in August, a decision that was described as “a particularly close call”. Bond prices fell on word that inflation is not yet dead and the expectation of future rate cuts declined.

Meanwhile the Dissenter Speaks

At about the same time that the Fed meeting minutes were released, Jeffrey Lacker of the Richmond Fed spoke before the Washington D.C. Chamber of Commerce on the regional economic outlook. Recall that Mr. Lacker has been the lone dissenter at both of the last two Fed meetings, casting his vote for a another quarter point hike while the rest of the board felt that “no-change” was the correct course.

He made a point to express his discomfort with what he’s seen in the inflation statistics lately.

I’ve said on several occasions that I would like to see inflation average about 1.5 percent over time, as measured by our preferred statistic, the price index for core personal consumption expenditures (often referred to as just “the core PCE index.”) Moreover, I have also said that I would be comfortable if inflation was a little higher or lower, coming in between 1 percent and 2 percent. Several other policymakers and economists have also endorsed that range as a functional definition of price stability. But inflation has been outside that comfort zone for over two years now. It was 2.2 percent in 2004, 2.1 percent in 2005, and has come in at a 2.5 percent annual rate so far this year. And inflation looks worse if, instead of using the core PCE index, we were to use the overall index, which includes energy prices. That measure of inflation was 3.2 percent over the last 12 months.

That’s funny – inflation looks worse if you include energy.

The official definition of inflation is now clearly two steps removed from reality – first you have the prices that people actually pay for things, then you have the overall consumer price index, and then finally, there is the definition of inflation in the eyes of practitioners of the dismal science – the core rate.

But, there appears to be a breach in the core.

Moreover, the longer inflation remains elevated, the more difficult it will be to bring it back down. As people observe actual core inflation of 2.5 percent, along with the FOMC’s reactions, they adjust expectations regarding future inflation, and those expectations become the basis for price setting in product and labor markets. (By the way, it was for his contributions to economic research on exactly this phenomenon that Professor Edmund Phelps was awarded the Nobel Prize in economics a few days ago.) If the Fed were to allow inflation to remain above target for too long, inflation expectations could become centered around the higher rate. Once that occurs, history tells us that strong and more costly policy actions would be needed to bring inflation and inflation expectations back down. We don’t have any perfect measures of inflation expectations, but what we do have suggests that market participants do not foresee a rapid fall in core inflation. This is why I have argued for further policy actions to convincingly restore price stability.

Economists really are a naive lot. For some reason they think that market participants are tuned into the whole idea of core inflation, and that somehow this is an indication of whether or not the Fed is doing its job? While we can all dream of inflation only being around two percent, that appears to be a concept that exists only in Fed studies and classrooms.

Someday, people will realize what is happening to their money, and if this survey is any indication – a survey that shows the number one worry people currently have is rising prices – that day may be sooner rather than later.

This article was republished with permission from Tim Iacono.

European Leaders Continue Debt Negotiations

2011-10-28T07:17:00.000-07:00

Tim Iacono provides a video clip rehashing the latest meeting between Eurozone leaders regarding how to solve the Greek debt crisis and wider concerns for the stability of the European currency union. Politicians have agreed the European Financial Stability Facility fund should be increased to $1.4 trillion to cover capital expenses that will be faced by banks and investors that are expected to take a as much as a 50% loss in a Greek bailout. The specific financial instrument that will facilitate this is still being debated, however, and one option may involve allowing China and Middle Eastern countries to buy into the debt. For more on this continue reading the following article from Tim Iacono.

It looks like they’ve agreed to something over in Europe, though it remains to be seen whether this deal will last any longer than any of the last half dozen or so agreements aimed at keeping the currency union from breaking apart.

Investors have reportedly agreed to take losses of 50 percent on Greek debt and French President Sarkozy told reporters that the EFSF bailout fund is about to be “leveraged up” to $1.4 trillion, the proverbial “bazooka” in the EU’s pocket. It looks like they’re on a roll…

This blog post was republished with permission from Tim Iacono.

Euro Doomed, Says Economist

2011-10-25T07:52:00.000-07:00

Economist Paul Krugman is predicting the failure of the euro, and feels that no solution yet offered by Eurozone economic powers will solve the default problem. He points out that Greece is more of a red herring, and that the real problem is the shake financial position of Italy, the Eurozone’s third largest economy. Italy cannot borrow against its own debt to save itself and rigid statutes prevent the type of currency printing trick used by other superpowers to pull themselves out of debt. The only hope for the euro is if the European Central Bank backs Eurozone debt, say Krugman, but leaders have made it clear that option is not on the table and so have sealed the fate of the euro. For more on this continue reading the following article from Economist’s View.

Is the euro system doomed?:

The Hole in Europe’s Bucket, by Paul Krugman, Commentary, NYTimes: If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way. ...

I’ll get to the tragedy in a minute. First, let’s talk about the pratfalls... Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from ... Italy, the euro area’s third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely. ...

To save the euro, this threat must be contained. But ... here’s the problem: All the various proposals ... ultimately require backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can’t achieve a rescue by lending money to itself. And France, the euro area’s second-biggest economy, has been looking shaky lately... There’s a hole in the bucket, dear Liza, dear Liza. ...

What makes the story really painful is the fact that none of this had to happen. ... Britain, Japan and the United States ... have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically. ...

But such action, we keep being told, is off the table. The statutes ... supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen. The broader problem, however, is that the whole euro system was designed to fight the last economic war. It’s a Maginot Line built to prevent a replay of the 1970s, which is worse than useless when the real danger is a replay of the 1930s. ...

The ... European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.

Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.

The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.

This blog post was republished with permission from Economist's View.

US Inflation Up, Prices Increasing

2011-10-20T07:15:00.001-07:00

The U.S. Department of Labor reports a 3.9% annual increase in inflation when including food and energy, with gasoline up 33.2% on the year and food 4.5% more expensive. Clothing costs are also on the rise, despite remaining lower than prices reported two decades ago thanks to inexpensive imports, leaving consumers to deal with price increases in three key purchase areas. Observers note inflation is now at its highest since September 2008, although the central bank reports inflation controls are in place and working. For more on this continue reading the following article from Tim Iacono.

The Labor Department reported that the rising cost of energy products and food drove consumer prices 0.3 percent higher in September and that the annual inflation rate now stands at 3.9 percent, the highest level since September 2008.

Paced by a 2.9 percent rise for gasoline, up 33.2 percent on a year-over-year basis, overall energy prices jumped 2.0 percent last month and are now up 19.3 percent from a year ago.

Food & beverage prices rose 0.4 percent in September and are now 4.5 percent higher than last year at this time while the “food at home” subcategory rose 0.6 percent for the third month in a row, now up a stunning 6.3 percent on a year-over-year basis.

Elsewhere, price increases were more moderate and clothing prices reversed their recent trend by dipping 1.1 percent last month, however, apparel prices are still 3.5 percent higher than a year ago, down from the August year-over-year rate of 4.2 percent that marked a 20-year high.

Amazingly, up until this summer, apparel prices had been 10 percent or more below the highs seen in the mid-1990s, this 15-year trend due largely to the rise in inexpensive imports. However, from April to August of this year, apparel prices have surged more than five percent, cutting this gap almost in half.

Here’s a long-term chart showing this recent dramatic increase:

Americans can now add clothing to two other categories where prices have been rising sharply lately – food and energy – as these indispensable items put more pressure on consumers despite assurances from the central bank that inflation is under control.

This blog post was republished with permission from Tim Iacono.

Canadian Housing Bubble Balloons Bigger

2011-10-19T08:16:00.000-07:00

While other once robust housing markets like China and Australia begin to show signs of weakness and the U.S. continues to struggle, Canada continues to enjoy spectacular growth. Tim Iacono points out that prices and sales volume are up across the country, with the north’s largest cities competing for the biggest numbers. Iacono wonders, though, when the bubble will burst and whether the Canadian housing market will experience the fall from grace seen in so many other countries, including the U.S. For more on this continue reading the following article from Tim Iacono.

It looks like China’s housing bubble is teetering, sales this fall down by half from the level of a year ago, and the Australian housing market has looked shaky all year, but that Canadian housing bubble seems nearly indestructible, charts like the one below from this Globe & Mail report now a real head scratcher for those of us south of the border.

Having just visited Calgary two months ago, I can attest to the residential areas looking a lot like Southern California in about 2005, but Toronto and Vancouver are apparently experiencing even bigger booms, as noted in the Globe & Mail report above, about the only question for residents being which big city will beat the other in price gains this year.

Last month, Toronto home prices rose 6.5 percent from a year ago, down from a 9.3 percent pace the month before, and with annual price gains in Vancouver recently falling from 20+ percent to 10.6 percent, a real battle is brewing. They note that “overall the market continues to appear healthy” and an economist offers only a mild cautionary note, words that sound eerily familiar to us in the U.S.

This blog post was republished with permission from Tim Iacono.

Acceptance No Answer to US Economic Turmoil

2011-10-18T09:12:00.000-07:00

Mark Thoma takes issue with economist Mark Spence’s determinative view that Americans must not only consume less, but expect less. Spence feels that international distributional effects have left little room in the low- and middle-class job market, and people must accept it. Thoma argues that while the pre-2008 bubble was responsible for gilding expectations, it is the poor investment of monies and resources into the financial market that is the true distribution problem. According to Thoma, the proper investment of wasted billions back into the jobs market could create growth and employment. For more on this continue reading the following article from Economist’s View.

Michael Spence:

The Global Jobs Challenge, by Michael Spence, Commentary, Project Syndicate: ...The third challenge is distributional. As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population gain, and others lose, certainly relative to expectations – and often absolutely.

Many advanced countries – in fact, most of them – have experienced limited middle-income growth. ... In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector. ...

What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?

Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. ...

None of this will be easy. ... Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.

I don't like the call to accept that things will be worse in the future, and to get used to it. It is generally based upon the idea that much of our growth was due to the bubble - it was false growth -- and hence led to the perception that we can grow faster than is actually possible.

But if the resources hadn't have been invested in the financial industry, they wouldn't have been wasted, they would have gone elsewhere. If we had taken all the resources (and talent) that went into the financial sector and directed it elsewhere, it would have promoted growth and employment -- and likely of a far more stable and broad-based variety. In my view the challenge is to redirect these resources into productive uses, and to fix the mal-distribution of income gains. But simply accepting that expectations need to adjust downward -- that the fate of the middle and lower classes is a diminished future -- is not acceptable. We can do better than that.

This blog post was republished with permission from Mark Thoma.

Eurozone Collapse Halted, Still Threatening

2011-10-14T07:28:00.000-07:00

Hugo Dixon of Reuters Breaking Views predicts a European Union (EU) financial disaster is still possible, but a more likely development is one where the EU experiences an extended period of zero or negative growth. Dixon argues there is no silver bullet; the situation has unraveled too much for politicians to save it with fiscal reform, and breaking up the EU would be a disaster in itself. The worst thing that could happen, Dixon says, is for the EU to shift toward protectionism in an effort to stimulate its economy, but he does not expect this to happen. For more on this continue reading the following article from Tim Iacono.

Those whose hopes of a much bigger crisis in Europe are about to be dashed after the final approval of the EFSF bailout fund by Slovakia can take heart in this view from Reuters Breaking Views founder Hugo Dixon that the chance of a “total disaster” still exists.

Muddling through with years of zero or negative growth is now seen as the most likely scenario, an outlook that, some time ago, would have been considered a disappointment, but, after the events of the last few months, seems much less of one now.

This blog post was republished with permission from Tim Iacono.

Double-Dip Recession Concerns Grow

2011-10-12T08:51:00.000-07:00

Tim Iacono speculates on the likelihood of another U.S. recession by summarizing the latest round of economic reports from around the world. All eyes are focused on developments in the Eurozone and questions remain whether France and Germany can collaborate to stave off widespread collapse, but powerful performance in the stock market indicate investors have not lost all hope. Iacono believes U.S. unemployment represents the turning point of a possible recession and that the new numbers do not look promising. He also cites the Economic Cycle Research Institute’s recent report on the prospects of the U.S. and global economy, which places the U.S. on a path to a recession that can’t be diverted. For more on this continue reading the following article from Tim Iacono.

[Following are excerpts from the current issue of the Weekend Update at Iacono Research.]

The latest batch of economic reports from around the world have called into question what had been, in the late-summer up until about a week ago, a growing consensus that the U.S. and other important parts of the global economy are either about to enter another recession or, in the view of some, are already in a new recession.

While clearly affected by the latest moves by European officials to stem the sovereign debt crisis, last week’s impressive bounce for stocks and commodities was also influenced by a fading sense of imminent calamity for economic growth following an increasing number of comparisons between 2011 and 2008 in recent months.

It’s worth taking a closer look at the question of whether the world is now facing another recession – the likelihood and, more importantly, the severity – as it is of utmost importance for any investor. Was last Monday’s low for stocks and commodities an enduring low or will another economic contraction produce even lower price levels in the period ahead?

One thing is clear – the U.S. economy today is much different than it was three years ago and the soaring unemployment rate is a key reason why.

(Continue reading this article at Seeking Alpha.)