Wednesday, July 20, 2011

Today's links

1--Bay Area home sales, prices drop from year earlier, SFGate

Excerpt: Home sales in the Bay Area fell 4.5 percent in June from a year earlier as tight credit restrained purchases, according to DataQuick.

A total of 7,998 houses and condominiums sold in the nine-county region last month, the fewest for a June since 2008, the data seller said Thursday. Transactions increased almost 15 percent from May, with price reductions luring investors and bargain hunters, DataQuick said.

"Last month was not a particularly strong June historically speaking, and one month's increase in sales from the prior month doesn't constitute a trend," John Walsh, the company's president, said in the statement.

The median price paid last month was $377,750, down 7.9 percent from $410,000 in June 2010 and a 1.5 increase from May. Foreclosures and short sales, in which a property is sold for less than the amount owed, together accounted for 45 percent of all transactions, DataQuick said.

2--Bank-owned home sales impact market,

Excerpt: The continuing stream of low-priced bank-owned homes entering the market has a profound effect on the overall housing market and home values.

The result of a foreclosure typically leads to a bank-owned sale of a home, which in most cases will be considerably less than what the original buyer paid before it was seized, it was noted in a Housing Intelligence report. Millions of these instances are taking place across the country, which will surely have an adverse effect on home prices in their respective locales.

The areas with the largest number of REO (bank-owned) sales and the regions that experienced the largest annual increases in REO activity all saw median existing home prices lag the national average during the first quarter. In these areas, foreclosures that ultimately lead to REO sales will continue to weigh on home prices.

Current housing data continues to show sluggish demand, despite rates falling back down to near-record lows. Home sales in both the new and existing home markets declined in May.

3--Is This More Than a Bump In the Road?, Tim Duy, Fed Watch

Excerpt: Data has not been kind in recent weeks, sending second quarter forecasts tumbling below 2%. But that is not all; third quarter forecasts are heading lower as well. Ryan Avent questions this rush to judgment:

Meanwhile, early forecasts for third quarter output growth are being revised down. That seems premature to me; the third quarter has only just begun and it still seems likely that low petrol prices and a recovering Japan, among other things, may buoy American output.

This is a good question – do we have enough data to appreciably alter estimates of the third quarter? As Avent notes, the quarter is only two weeks old, and at least a few temporary factors are already in reversal. Once these factors clear, hesitancy to hire new employees should dissipate....

Bottom Line: My judgment is not too far from Avent’s – temporary factors are at play. My simple model, however, is telling me that those temporary factors have more persistent impacts than my judgment initially expected. Critically, although oil prices have eased, gasoline prices remain near recent highs, and this looks to be having a significant impact on consumer attitudes. Moreover, there are two big negative risks in the final half of this year, European debt crisis and US fiscal contraction. Overall, I would agree with forecasters leaning on the side of caution and shade down my expectations for the second half while hoping the error is in Avent’s favor.

4--Economic slowdown ahead, Pragmatic Capitalism

Excerpt: This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.”

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”

Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.”

5--Why are Treasuries up?, Pragmatic Capitlism

Excerpt: ...there’s something far simpler occurring here that consistently causes a huge amount of misconception in the markets and economic circles where the “best” thinkers dominate the agenda with their defunct gold standard paradigm. Edward Harrison at Credit Writedowns provides the answer to our headline question:

“But when I see Italy and Japan, I think currency sovereignty: the ability, not the willingness of government to hand you another paper IOU with the exact same amount printed on it” when you present it with an obligation in the currency of account.

Japan has currency and inflation risk and all the other risks I outlined but it has an infinite ability to hand you government-created IOUs. Italy does not and can be bankrupted as a result. It’s as simple as that.”

Ding ding ding! Someone give Edward a gold star. There’s no such thing as Japan “running out” of Yen. Just like the USA can’t run out of US Dollars. So bond markets essentially focus on one facet of the market – the inflation risk. As we all know, Japan is still battling very low inflation. And the USA can’t seem to get much traction going on the inflation front either. So why aren’t treasuries cratering? Because there’s no such thing as an autonomous currency issuer “running out” of the currency that they have a monopoly supply of. As Edward said, “It’s as simple as that.”

6--The European Monetary Union is the Titanic, Marshall Auerback, New Deal 2.0

Excerpt: The Iceberg Cometh: An economic and financial crisis will soon be brought about by the collapse of the European Monetary Union. And everyone goes down with the ship!...

The European Monetary Union has hitherto only survived because whenever push comes to shove, the ECB has stepped in as the “missing” fiscal agent and has kept the bond markets at bay. It continues to “write the check” whenever the markets seek to shut down the individual markets on the grounds of looming insolvency.

But Finance Minister Tremonti is right: the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union. Each successive “resolution” is merely a place-holding operation. The EU bosses are just buying time and kicking the can down the road. Ultimately, to survive the system has to add a unified fiscal authority and abandon the fiscal rules embodied in the Stability and Growth Pact or accept the experiment has failed and dissolve the union. The constant stop-gap measures being introduced on a seemingly ad hoc basis are leading toward a very unpleasant dissolution, the end result for which could be Europe’s “Lehman” event. Meanwhile, the iceberg is approaching rapidly....

Germany is in the first class cabin of the Titanic. Another way of looking at it is that figures like Chancellor Merkel are leading the PIIGS to slaughter in the abattoir, not realizing that they are on the same conveyor belt. The tragedy ushered in by the current crisis is entering into its critical phase, and the small mindedness of the policy response could well spell the death of not just a currency but also a vision for a unified Europe. The essential problem is that the EU was founded as a political venture but quickly grew into a (promising) economic venture. The irony is that the lack of a true political union — which would have permitted a unified fiscal policy — is precisely what will kill the whole idea.

7--Is a deleveraging consumer spending less, The Big Picture

Excerpt: Killer chart this week from David Leonhardt (We’re Spent), which very much supports the weak post crisis recovery thesis, as consumers cut back much more sharply. They are delveraging rather than adding more debt, this they cvannot spend they way they did previously. (great chart)

8--Wall Street Journal proves Keynes was right, Salon

Excerpt: Economists agree: A lack of consumer demand explains why employers aren't hiring...

A seven-word Wall Street Journal headline says it all: "Dearth of Demand Seen Behind Weak Hiring."

The first paragraph:

The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.

It's not every day that one sees liberal econoblogger Keynesian orthodoxy stated so bluntly in the Wall Street Journal, so we should cherish it when it happens. But what could be more obvious, even in the absence of rigorous training in economics? In the absence of demand, businesses will refrain from ramping up production and adding staff -- no matter what employers think about the future regulatory climate. To prime this pump, to rev up this engine, to get the "delicate machine" working properly, the first focus for economic policymakers should be figuring out ways to boost demand.

Of course, the perception that Obama's stimulus did not fix the economy, combined with the Republican takeover of the House, has ensured that the political prospects of aggressive government-sponsored demand creation are nil. But in the absence of any positive action, is it too much to hope that our government doesn't purposefully attempt to subtract demand from the economy?....

The evidence that a country in the U.S's current position -- low interest rates, high unemployment, very slow economic growth -- would benefit from short-term spending cuts is slim to nonexistent. The best bang-for-the-buck rationale for cutting government spending applies to economies that are growing quickly and/or are plagued by high interest rates and inflation. At his next press conference, President Obama should be waving today's edition of the Wall Street Journal at reporters and yelling, See, this is why tying the debt ceiling to budget cuts is a stupid, dangerous idea!

Unfortunately, Obama also seems to believe that is more important to build business "confidence" through deficit reduction than it is to boost demand. Finally, some bipartisan consensus!

9--The Political Economy of the Lesser Depression, Paul Krugman, New York Times

Excerpt: Everyone in the forecasting business is scrambling to mark down both their estimates of second-quarter growth and their forecasts for later in the year. Goldman Sachs (no link) was pretty optimistic a few months ago; now they’ve grown quite pessimistic: (chart)

At this point, GS is predicting an unemployment rate of 8 3/4 percent at the end of 2012 — five years after the Great Recession began.

They also note that the bump in underlying inflation due to commodity price hikes seems to be ebbing:(chart)

As I pointed out yesterday, the same thing is true of the sticky-price CPI, which is arguably the conceptually closest thing to what we really mean by core inflation:(chart)

So, terrible growth prospects; low inflation; oh, and low interest rates, with no sign of the bond vigilantes. Ordinary macroeconomic analysis tells you very clearly what we should be doing: fiscal expansion and monetary expansion by any means we can manage; in fact, the case for a higher inflation target pops right out of just about any model capable of producing the kind of mess we’re in.

And what are we talking about in policy terms? Spending cuts and an end to monetary expansion.

...the upshot is terrible: more and more, this really does look like the Lesser Depression, a prolonged era of disastrous economic performance. And it’s entirely gratuitous.

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