Does she have any idea what a risk is? I think she is confusing risk and damage. The risk is significant now. The risk wouldn't even be the issue if house prices are falling amidst rising unemployment. That would be the perfect storm, and it would only be a matter of counting up the damage. Unless of course she is talking about the risk of a depression.
Isn't Yellen the stooge who all but denied the existence of a housing bubble, only two short years ago?
Why is it that these highly paid, highly connected "doctors" can't see what a bunch of rowdy anonymous contrarians on the interweb have known for three years?
Based on Yellen's persistent, lagged perception of reality, I have to conclude that things are much, much worse than she presently suggests. She's signaling that consumer spending has ground to a complete halt.
How can a signifcant decline in employment be avoided? That is the crucial question. I believe the shockwaves of unemployed and underemployed are just beginning.
The official unemployment numbers are skewed because of the siginificant number of illegals that are employed in construction trades. And the tremendous number of independent contractors that are 1099 and ineligible for unemployment. However, those dollars are still spent for the most part in the real economy, and falling demand will cause knockon effects in employment in other areas.
That is what Yellen fears, and what is slowly coming to pass. The previous article about how commercial is entering a slowdown without panic yet illustrates the domino effect that this is yielding in the asset markets.
it wasn't years ago she claimed everything was ok; more like just 6 mo ago. it is amazing how us bloggers can see what these "experts" can't. ALL 88 of Bloombergs economists missed Fridays employment report decline.
The exceedingly weak August payroll survey was conducted before the crisis had much impact. What appears to have happened was that someone in the Administration decided to recognize the recession and released weak numbers either to force or to help accommodate the Fed in justifying an imminent easing.
I'm usually not much of a conspiracy theorist, but given how much wiggle room there is in the employment numbers, this is an interesting outlook.
If we can extrapolate where we are likely headed, I guess it's logical to look back at those who two years ago were saying then when Yellen is admitting to now.
Anectodal evidence suggests that those who are saying "this is likely temporary" are not those who forwarned of it's arrival in the first place.
I don't hear anyone who foresaw this now saying that it's likely to be shortlived, or that the consumer will stay strong, or that the global market will save us....blah blah blah.
If you are forced to weed out every voice who missed the coming housing crash or credit crunch in the first place, there would not be anyone left to tell give us hope about what's to come.
"Why is it that these highly paid, highly connected "doctors" can't see what a bunch of rowdy anonymous contrarians on the interweb have known for three years?"
Yellen in '05: " ...there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally highthat there is a "bubble" element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk. There is a controversy about just why the rates have stayed so low. ... I think it's obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth."
Her "Ghost Towns of the West" speech last year was a wake up call for many (of course the people reading this blog were already on top of housing).
I concur...I think that has been the biggest surprise, maybe the only surprise to me in the last 3 years was that they admited on 3 different economic reports that their economists were wrong....
I'm not convinced that the economic indicators are pointing to a sure bet rate cut though.
Yellen also said this, "While I do think that the present financial situation has added appreciably to the downside risks to economic activity, we should remember that conditions can change quickly for better or for worseespecially in financial marketsso its hard right now to speak with a great deal of confidence about future economic developments. Its also important to maintain a sense of perspective: past experience does show that financial turbulence can be resolved more quickly than seems likely when were in the middle of it. Moreover, the effects of these disruptions can turn out to be surprisingly small. A good example is the aftermath of the Russian debt default in 1998. Many forecasters predicted a sharp economic slowdown as a result; but instead, growth turned out to be robust."
So you take this to mean we shouldn't expect the Fed to overreact to turbulence that may seem bad to us now. I am still counting on BB to NOT cut and to NOT bail out speculators and to NOT collapse the dollar. I'll guess we'll see in a week.
Yes, CR, thanks for reminding us that she made that "ghost town" remark. I had seemed to recall she was more leading edge than most. I'm sure this has been asked 100 times here, but where is Ivy Zelman these days? (Perhaps Buffett hired her so he can figure out the best way to make a zillion dollars off this whole mess?)
Today's market has shown a meaningful break in a pattern that has been like clockwork for six months: inverse moves between yen and speculative stocks.
I said when yen weakens at the same time small/emerging stocks weaken, it will mean hedge funds are moving money "net short" to crush their more vulnerable peers, who are leveraged long.
A shift of yen carry liquidity from the long side to the short side of the market would be hugely negative for all equities, expecially emerging and small cap. One day does not a trend make, so keep watching.
OK , so I am at this open house this weekend, here in the DC suburbs, walk in, I'm wandering around the place, then this lady comes over and says for 250,000 basis points she will show me the rec room..
So if the velocity of money 6 months ago was helping us get anemic GDP growth, what happens when the velocity of money falls off a cliff?
For once I'm being rhetorical.
Rate cuts won't help, even 200bp. Until the financial weasels can develop(and implement) more transparent risk management products, the problems remain the same. Even then the velocity of money won't hit past levels for a long while.
Up until August 17th, the FOMC was obsessed with inflation which was at and continues on historic lows. They were especially concerned about the price of oil causing inflation. Everytime the price of gas went up, other consumer spending went down almost dollar for dollar. So, retail took the difference on their margins or sales.
Now we'll see an about face with some face-saving.
The worst U.S. housing slump in 16 years may lead mortgage companies to eliminate almost 100,000 jobs, more than double the number already cut this year.
OT, can you believe this? this guy is going to push for increased limits for GSEs. I'm sure it will help his campaign financing, for which we will all pay with inflated houses and mortgage interest charges:
(CBS/AP) A truck carrying mining explosives blew up after colliding with another vehicle in northern Mexico, killing at least 37 people, including three reporters who had come to the scene, state and federal officials said.
Maximo Alberto Neri Lopez, a federal police official, said 37 people were killed and 150 were injured. He said the explosion left a 10-by-40 foot crater in the concrete.
(snip)
Meanwhile, six explosions ripped apart pipelines for Mexico's state oil monopoly early Monday, the company said. The blasts were believed to be sabotage and 12,000 people were evacuated afterward.
Amazing, the report is "sabatoge" not "terrorism"
how they confabulate.
Here's a thought. The war in Iraq is costing about 1 billion dollars every two days. more than half the taxpayers war funding dollars go to private contractors.
Is there not a close relationship between some private contractor entities and private equity funds that have been involved in the CDO-hedge -fund-tranch mess?
Japan and China are now about 50% of the market in US treasuries. The war is funded by debt.
The country is hemorrhaging red ink and the war is a significant financial consideration complicating the banking liquidity crisis.
Now we'll see an about face with some face-saving.[lama]
We'd better. If the Fed doesn't cut rates, then, Heaven forfend, we could see housing prices come down to such an affordable level that the financially responsible J6P might buy a house, stop being a renter, and deprive Retail of some revenues.
Her speech is up on Bloomberg video now, so you may listen to it while you toil at work. ;^)
I have strict office protocols in place. Durring business hours p0rn and anything with explosions are the only acceptable screen content. Fortunately, for some reason, this one made it through the content filters.
ilsm talking about risk and damage got me thinking (it happens).
Talk about risk, is about investment, not labor (losing your job), not an impending slowdown (your neighbors losing their jobs), not the possibility of some civil unrest if the wealth disparity continues, not the possibility that an asteroid will swat us out of the sky and ruin GWB's wonderful legacy.
"Risky economy", hurts my ears --not like "risky business".
I'd like to see a discussion here of the implications for the fed of the similarities/differences between the present situation and the LTCM affair and the Japanese bubble burst in the early '90's.
Like LTCM, we have a situation now where there is a need for orderly progress in unwinding and valuing positions (walk, don't run down the fire escapes). In the LTCM case, the reversion to the mean worked in favor of their positions, and the creditors who bailed them out (with the fed's encouragement and lowering of rates) were eventually made whole. In the present situation there are 2 differences: first, the location of the troubled assets is hard to pinpoint, feeding the overall reluctance of investors to fund the commercial paper vehicles (SIVs) and banks to lend to each other. Second the reversion to the mean on the part of the real estate markets - prices getting back to normal multiples of incomes or rents - will worsen the situation and create even more impaired assets. Like the LTCM situation, though, if the cetral banks forced immediate marking to market and meetiing margin calls, the forced sales would drive prices, at least in certain asset classes, below their ultimate realizable value in an "orderly" liquidation. Is it generally felt that he fed's rate cutting in the LTCM environment probably helped the liquidation, and while it may have contributed to the buildup of the '00 dotcom bubble, did not result in wage and price inflation?
In some ways the situation is more like the Japanese bubble pop, of which I have only a layman's knowledge. There, the banks were stuck with significant numbers of impaired loans, and if they were suddenly marked to market, and if capital adequacy requirements were rigorously enforced, there would have been widespread failure. If regulated banks in the US and Europe are forced to fund a significan portion of the 1.5 trillion in SIV's, as well as meet the demands of Investment banks (to support pier loans) and hedge funds (to buy time for orderly liquidation) they could end up in a similar position with lots of underwater assets and strained capital adequacy. The Japanese solution was to lower the rates to zero and let the positions unwind in geologic time, with some casualties along the way. The yen did drop from '91 to '95. The difference in the present US situation is that they had a trade surplus, and a large domestic savings pool, whereas we have a large trade deficit, and an overleveraged household sector. Lowering rates and torpedoing the dollar may not work, as long rates will have to rise to fund the trade and budget deficits. I'm not even sure if lowering rates will result in hyper inflation (other than in oil and some commodity prices), because the consumer has very little capacity for additional borrowing to support consumption and therefore wages and prices. This is where I get a little lost and would appreciate the incisive anyltical skills of the board.
Thus, the Fed needs to ease and will ease, substantially I firmly believe, not to bail out Wall Street but to make certain that weaker growth on Main Street does not morph into recession, which would carry serious debt-deflation consequences
Roundtable on the consequences
I can't figure out if i'm for or against debt-deflation...
i don't have any.. NONE
is that good for me in that scenario , or bad
I happen to agree with her assessment....it will be a brave new world out there for any loan that is not a GSE deal. And the economy will take a hit for this foolishness too.....the magnitude of the hit is still in question - might be recession-type hit or something less.
But a big slowdown is in the works for sure.
I have the exact same criteria set up on my firewall and Yellens speech also somehow passed through!
There must be a hidden meta tag about a chick with no balls and no clue.
Seriously, this week's concern seems to be PCE. This is one of those datums that the Fed gets to see sooner and better than the rest of us cellar cubicle troglydtes. I'm thinking they are seeing a reluctant consumer and the Grinch stealing Christmas. Add to that mortgage lenders are exceptionally exposed to rapid employment losses due to the persistent low/negative savings rate. People don't have any liquidity and credit is going away.
.....the magnitude of the hit is still in question - might be recession-type hit or something less.
But a big slowdown is in the works for sure.
It's funny how we've gone from a pre-Greenspan economy where a recession was just a routine annoyance, to a point today where it's some unthinkable sort of cataclysm that only occurs in the most unusual circumstances.
I don't think that bodes well for how we're going to react to adversity. Everybody knows we've been bad, and nobody wants to pay.
So what will the Fed do if the war in the Middle East starts up again with Israel vs Syria this time?
Um, gas is now $4, but there is no inflation?
Rock and hard place time viz 1973;-}
Someday this war's gonna end...
I think something getting more expensive has nothing to do with inflation or even prices for that matter. Otherwise how can Japan have deflation while China has serious inflation? Don't they get their gas from the same places?
And Mock Turtle - are you on the wrong blog??
JR in Big D | 09.10.07 - 1:54 pm | #
If I strayed to far OT I apologize to all.
I thought that the strain of gov indebtedness relative to ongoing war costs, the apparent sabotage of a major oil pipeline on our southern boarder etc was a related, all-be-it tangential consideration, as the Fed tries to cope with a financial crisis.
Maybe Yellen hasnt read this advertising supplement from the LA Times. She is such a bear.
From Standard Pacific Homes:
Yes, the time to buy is now!
Many people are apprehensive about todays housing market. Is now a good time to buy? If youre wasting money on rent each month or have outgrown your current home, the answer would be a simple Yes! Although the need for more space or the simple desire to own are motivation enough, there are also other reasons why now is the perfect time to buy.
First off, interest rates are still at a historic low. Although theyve gone up a bit in recent months, theyre still much lower than they were ten years ago. Nows your chance to get an affordable rate before they zoom back up. Secondly, home ownership gives you a considerable tax break. In this sense its actually more affordable each year to own rather than rent. Lastly, owning gives you the freedom to personalize your home and make it your own. And with that comes a certain sense of pride, accomplishment, and peace of mind.
Is it good when builders use words like zoom to describe future mortgage conditions? Um, doesnt renting avoid property taxes in bubble states?
Funny, I read her speech as slightly to the easing side of neutral. Seems like there was a lot of time spent justifying a quick change away from the recent on-guard-against-inflation statements...
Yellen states the obvious point that the house price to rent ratio (the P/E ratio) has NOT fallen much, and further drops in prices are likely if the price to rent ratio is to return to historic norms.
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
"I thought that the strain of gov indebtedness relative to ongoing war costs, the apparent sabotage of a major oil pipeline on our southern boarder etc was a related, all-be-it tangential consideration, as the Fed tries to cope with a financial crisis."
I will now withdraw to my shell.
mock turtle | 09.10.07 - 2:21 pm |
This certainly worries me. Mexico is consistently in the top four countries we import oil from and last I checked the economic prognosticators were consistently worried about the price of gas and the consumer. I know the war is a "political" issue but it has to be funded somehow and currently we are doing it on credit. . .and credit is becoming more expensive. Pretty much all the historical precedents for such situations are bad.
There has to be more than a few people out there that worry over "just" the economics of this situation, politics and ethics aside.
I wish withdrawing into a shell could protect us from this mess.
You don't hear anyone comment on the dollar in the mainstream press because there isn't an easy news peg. When you do so those stories, they are completely superficial, focusing on traveling to Europe or sales of Boeing jets.
As I wrote in a different thread, be careful about overinterpreting comments by individual Fed governors and presidents. Fact is, those people are constantly making speeches. No individual speech gives much, if any, insight into the direction of Fed policy. At best, if you look at the trend of those speeches you can get a minor insight into the thinking of minimally intelligent economists. That's about it.
Maybe when the index hits its all time low of 78.19, reporters might start to take notice. Until then its all how bad britneys performance was last night.
"Are you liquid?"
"Volumes fallen below 205bn per day?"
"Expenses gone up?"
" Market gone and changed on ya real sudden like?"
"Didn't see sumthin' comin?"
"Need a few billion holdover while you shuffle payments?"
"So-called friends not anserin' the phone no more?"
Please don't withdraw into your shell, Mock Turtle.....I do see your point. However, if we had no Iraq expense, I doubt we would have avoided the current liquidity problem we have today.
The mortgage industry has a history of shooting themselves in the foot. This time, it looks like the rating agencies and investment houses were holding the gun and helping the industry take aim. But the aim was a bit off and it looks like more important body parts were hit......and the bleeding hasn't stopped yet.
What Yellen is saying is that once the bleeding has stopped, chances are none of the participants in the current crisis will pick up a gun again for a long time.
Yellen states the obvious point that the house price to rent ratio (the P/E ratio) has NOT fallen much, and further drops in prices are likely if the price to rent ratio is to return to historic norms.
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
Peterbob
And as I listen further, she says that price growth in owners equivalent rent will moderate. And this is based on actual rents observed.
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
Page 3 of Shiller's paper presented at Jackson Hole is one indication:
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
Well, I sold my last rental sfr in Apr '06 to my own listing realtors who thought that rents would . They raised the rent, lost the tenant and have it back on the market listed as an agency exclusive. I can't wait to see the wishing price.
Look, people can't afford their lifestyles. That simple. They won't discard the Audi, the jet ski, the Tahoe timeshare, the Cabo vacation and Prada in reverse order. They will cut everywhere and also be stuck paying for those luxuries and thus have little left over for things like food and shelter.
I got out not just because the rent/sales ratio went above 250 but because in Apr '06 the only people renting were people who couldn't get 100% LTV I/O neg-am toxic mortgages. I wouldn't let these people know where I live nevermind take custody of a quarter million dollar depreciating asset.
For rents to rise substantially, the new renters are going to have to get money from somewhere. If they aren't selling houses to each other any longer, where will it come from?
Scroll down to the "Crisis in asset backed commercial paper" post and don't skip the comments. Mish makes a strong case for deflation and the inability of the Fed to inflate away the credit crunch.
Conclusion: "Credit booms do not end in inflation as most people believe. Credit booms are inflation that end in deflation. This credit boom is not any different."
On the 100% way up the speculative ladder, it's not their job to detect asset price bubbles. But give a 5% drop and they worry about the effects on spending and systemic risk. Something has to give here.
Unfortunately, it appears that will be the value of the dollar.
I love the quote that "innovations might not have spread risk as effectively as we thought". You mean Wall Street's shell-game innovation didn't remove risk from the $0 down $720k loan to the $15k a year mexican fieldworker laboring in Janet's backyard?
BERNE, Switzerland (Reuters) - The world's top banking authority, the Basel Committee, is considering new capital charges that could discourage some of the risky behavior behind the current credit crunch by making it more expensive.
None of these issues have taken the Basel Committee by surprise, Zuberbuehler said, but simply designing and implementing the new capital-charge rules proved cumbersome and provoked "regulatory fatigue" among the banks. And that led the committee to delay some measures on liquidity.
"Everybody agreed that the liquidity issue was the next big thing after the capital issue," Zuberbuehler said. "(But) you can't have too many hats in the air at the same time."
REALLY? You think that allowing every tom, Dick and Harry to pile into stuff they couldn't figure out and can't price, you don't think that having a conservative stance towards holding this stuff as reserves might be a good idea at 1st?
According to wikipedia, she's from Brooklyn, not Chicago. Haven't listened to the video yet, but I must say the two accents are pretty distinct to my ear. (I'm from one place and lived hard by the other for many years.)
After her speech lunch consisted of lobster bisque in a rate reduction, argula salad with Golden Ball pears in a yogurt apple cider vinegar dressing. Bologna stew in a deep do do tomato broth spiked with tiny tidbits of steak tartare (trim and grind the red meat twice). Roasted stock market potatoes with a few drops of Tabasco sauce. Choice of dessert.
G-Ray I have enjoyed your comments lately over at Mish's site, thanks.
Whats next? Noting the textbook reversal today I would like to think the glass is half-full. As for the news about Mexico and their pipelines, astute timing.
Time for the Feds. to do their part in the interest of NATIONAL SECURITY!
And as I listen further, she says that price growth in owners equivalent rent will moderate. And this is based on actual rents observed.
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
The real question is the extant to which the mania-driven overbuilding will cause real rents to FALL because of an oversupply of housing. Condos, where the rental supply is most comparable to the purchase supply are likely to be HAMMERED. I would be surprised if condo prices DIDN'T lose 50% in overbuilt markets.
first.
Does she have any idea what a risk is? I think she is confusing risk and damage. The risk is significant now. The risk wouldn't even be the issue if house prices are falling amidst rising unemployment. That would be the perfect storm, and it would only be a matter of counting up the damage. Unless of course she is talking about the risk of a depression.
Boy, it's getting easier and easier to find people who will say these kinds of things now.
Isn't Yellen the stooge who all but denied the existence of a housing bubble, only two short years ago?
Why is it that these highly paid, highly connected "doctors" can't see what a bunch of rowdy anonymous contrarians on the interweb have known for three years?
Based on Yellen's persistent, lagged perception of reality, I have to conclude that things are much, much worse than she presently suggests. She's signaling that consumer spending has ground to a complete halt.
How can a signifcant decline in employment be avoided? That is the crucial question. I believe the shockwaves of unemployed and underemployed are just beginning.
The official unemployment numbers are skewed because of the siginificant number of illegals that are employed in construction trades. And the tremendous number of independent contractors that are 1099 and ineligible for unemployment. However, those dollars are still spent for the most part in the real economy, and falling demand will cause knockon effects in employment in other areas.
That is what Yellen fears, and what is slowly coming to pass. The previous article about how commercial is entering a slowdown without panic yet illustrates the domino effect that this is yielding in the asset markets.
Someday this war's gonna end...
Ca REOS up 471%. Maybe one of these is Yellens former home?!??!
Central Valley Business Times
Craven Moorehead
it wasn't years ago she claimed everything was ok; more like just 6 mo ago. it is amazing how us bloggers can see what these "experts" can't. ALL 88 of Bloombergs economists missed Fridays employment report decline.
From John Williams at shadowstats.com:
The exceedingly weak August payroll survey was conducted before the crisis had much impact. What appears to have happened was that someone in the Administration decided to recognize the recession and released weak numbers either to force or to help accommodate the Fed in justifying an imminent easing.
I'm usually not much of a conspiracy theorist, but given how much wiggle room there is in the employment numbers, this is an interesting outlook.
Geoff,
I have not studied 'risk' lately.
But in reliability a hazard function exists when the probablity of loss/failure increases with some measurable paramter.
Sort of like the squeeky wheel already means something bad has happened.
I think we are seeing a rising hazard function confused with simple risk.
or Maybe she called The Tan Man and he stated that they were preparing for a big write down - speculation is in the billions...
If we can extrapolate where we are likely headed, I guess it's logical to look back at those who two years ago were saying then when Yellen is admitting to now.
Anectodal evidence suggests that those who are saying "this is likely temporary" are not those who forwarned of it's arrival in the first place.
I don't hear anyone who foresaw this now saying that it's likely to be shortlived, or that the consumer will stay strong, or that the global market will save us....blah blah blah.
If you are forced to weed out every voice who missed the coming housing crash or credit crunch in the first place, there would not be anyone left to tell give us hope about what's to come.
"Why is it that these highly paid, highly connected "doctors" can't see what a bunch of rowdy anonymous contrarians on the interweb have known for three years?"
Groupthink Groupthink - Wikipedia, the free encyclopedia
Craven Moorehead, I believe Yellen was one of the first Fed Presidents to express concern about housing.
Yellen in '05: " ...there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally highthat there is a "bubble" element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk. There is a controversy about just why the rates have stayed so low. ... I think it's obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth."
Her "Ghost Towns of the West" speech last year was a wake up call for many (of course the people reading this blog were already on top of housing).
Best Wishes.
idoc,
I concur...I think that has been the biggest surprise, maybe the only surprise to me in the last 3 years was that they admited on 3 different economic reports that their economists were wrong....
John Galt
I'm not convinced that the economic indicators are pointing to a sure bet rate cut though.
Yellen also said this, "While I do think that the present financial situation has added appreciably to the downside risks to economic activity, we should remember that conditions can change quickly for better or for worseespecially in financial marketsso its hard right now to speak with a great deal of confidence about future economic developments. Its also important to maintain a sense of perspective: past experience does show that financial turbulence can be resolved more quickly than seems likely when were in the middle of it. Moreover, the effects of these disruptions can turn out to be surprisingly small. A good example is the aftermath of the Russian debt default in 1998. Many forecasters predicted a sharp economic slowdown as a result; but instead, growth turned out to be robust."
So you take this to mean we shouldn't expect the Fed to overreact to turbulence that may seem bad to us now. I am still counting on BB to NOT cut and to NOT bail out speculators and to NOT collapse the dollar. I'll guess we'll see in a week.
Yes, CR, thanks for reminding us that she made that "ghost town" remark. I had seemed to recall she was more leading edge than most. I'm sure this has been asked 100 times here, but where is Ivy Zelman these days? (Perhaps Buffett hired her so he can figure out the best way to make a zillion dollars off this whole mess?)
Today's market has shown a meaningful break in a pattern that has been like clockwork for six months: inverse moves between yen and speculative stocks.
I said when yen weakens at the same time small/emerging stocks weaken, it will mean hedge funds are moving money "net short" to crush their more vulnerable peers, who are leveraged long.
A shift of yen carry liquidity from the long side to the short side of the market would be hugely negative for all equities, expecially emerging and small cap. One day does not a trend make, so keep watching.
Pimco guys are calling for 200 bps drop...
PIMCO - Global Central Bank Focus- August/September 2007 "Teton Reflections"
OK , so I am at this open house this weekend, here in the DC suburbs, walk in, I'm wandering around the place, then this lady comes over and says for 250,000 basis points she will show me the rec room..
Things must be getting bad out there...
Fred Garvi
Her speech is up on Bloomberg video now, so you may listen to it while you toil at work. ;^)
So if the velocity of money 6 months ago was helping us get anemic GDP growth, what happens when the velocity of money falls off a cliff?
For once I'm being rhetorical.
Rate cuts won't help, even 200bp. Until the financial weasels can develop(and implement) more transparent risk management products, the problems remain the same. Even then the velocity of money won't hit past levels for a long while.
Up until August 17th, the FOMC was obsessed with inflation which was at and continues on historic lows. They were especially concerned about the price of oil causing inflation. Everytime the price of gas went up, other consumer spending went down almost dollar for dollar. So, retail took the difference on their margins or sales.
Now we'll see an about face with some face-saving.
Bloomberg
The worst U.S. housing slump in 16 years may lead mortgage companies to eliminate almost 100,000 jobs, more than double the number already cut this year.
OT, can you believe this? this guy is going to push for increased limits for GSEs. I'm sure it will help his campaign financing, for which we will all pay with inflated houses and mortgage interest charges:
Schumer to Seek Mortgage Funding Boost - WSJ.com
I always had a problem with how hypocritical democrats are, but I should not be really surprised. We will all be helping each other out, won't we?
(CBS/AP) A truck carrying mining explosives blew up after colliding with another vehicle in northern Mexico, killing at least 37 people, including three reporters who had come to the scene, state and federal officials said.
Maximo Alberto Neri Lopez, a federal police official, said 37 people were killed and 150 were injured. He said the explosion left a 10-by-40 foot crater in the concrete.
(snip)
Meanwhile, six explosions ripped apart pipelines for Mexico's state oil monopoly early Monday, the company said. The blasts were believed to be sabotage and 12,000 people were evacuated afterward.
Amazing, the report is "sabatoge" not "terrorism"
how they confabulate.
Here's a thought. The war in Iraq is costing about 1 billion dollars every two days. more than half the taxpayers war funding dollars go to private contractors.
Is there not a close relationship between some private contractor entities and private equity funds that have been involved in the CDO-hedge -fund-tranch mess?
Japan and China are now about 50% of the market in US treasuries. The war is funded by debt.
The country is hemorrhaging red ink and the war is a significant financial consideration complicating the banking liquidity crisis.
maybe some day this war's not gonna end?
crispy, I saw McCulley refer to a 100 bp cut by year end, but I didn't see the 200 beep call in there.
Now we'll see an about face with some face-saving.[lama]
We'd better. If the Fed doesn't cut rates, then, Heaven forfend, we could see housing prices come down to such an affordable level that the financially responsible J6P might buy a house, stop being a renter, and deprive Retail of some revenues.
Her speech is up on Bloomberg video now, so you may listen to it while you toil at work. ;^)
I have strict office protocols in place. Durring business hours p0rn and anything with explosions are the only acceptable screen content. Fortunately, for some reason, this one made it through the content filters.
ilsm talking about risk and damage got me thinking (it happens).
Talk about risk, is about investment, not labor (losing your job), not an impending slowdown (your neighbors losing their jobs), not the possibility of some civil unrest if the wealth disparity continues, not the possibility that an asteroid will swat us out of the sky and ruin GWB's wonderful legacy.
"Risky economy", hurts my ears --not like "risky business".
"a big issue is whether developments in the relatively small housing sector will spread to the large consumption sector"
Maybe somebody should tell Janet that the U.S. housing sector is the largest asset class in the world, $20 trillion.
At least, it was until recently.
I'd like to see a discussion here of the implications for the fed of the similarities/differences between the present situation and the LTCM affair and the Japanese bubble burst in the early '90's.
Like LTCM, we have a situation now where there is a need for orderly progress in unwinding and valuing positions (walk, don't run down the fire escapes). In the LTCM case, the reversion to the mean worked in favor of their positions, and the creditors who bailed them out (with the fed's encouragement and lowering of rates) were eventually made whole. In the present situation there are 2 differences: first, the location of the troubled assets is hard to pinpoint, feeding the overall reluctance of investors to fund the commercial paper vehicles (SIVs) and banks to lend to each other. Second the reversion to the mean on the part of the real estate markets - prices getting back to normal multiples of incomes or rents - will worsen the situation and create even more impaired assets. Like the LTCM situation, though, if the cetral banks forced immediate marking to market and meetiing margin calls, the forced sales would drive prices, at least in certain asset classes, below their ultimate realizable value in an "orderly" liquidation. Is it generally felt that he fed's rate cutting in the LTCM environment probably helped the liquidation, and while it may have contributed to the buildup of the '00 dotcom bubble, did not result in wage and price inflation?
In some ways the situation is more like the Japanese bubble pop, of which I have only a layman's knowledge. There, the banks were stuck with significant numbers of impaired loans, and if they were suddenly marked to market, and if capital adequacy requirements were rigorously enforced, there would have been widespread failure. If regulated banks in the US and Europe are forced to fund a significan portion of the 1.5 trillion in SIV's, as well as meet the demands of Investment banks (to support pier loans) and hedge funds (to buy time for orderly liquidation) they could end up in a similar position with lots of underwater assets and strained capital adequacy. The Japanese solution was to lower the rates to zero and let the positions unwind in geologic time, with some casualties along the way. The yen did drop from '91 to '95. The difference in the present US situation is that they had a trade surplus, and a large domestic savings pool, whereas we have a large trade deficit, and an overleveraged household sector. Lowering rates and torpedoing the dollar may not work, as long rates will have to rise to fund the trade and budget deficits. I'm not even sure if lowering rates will result in hyper inflation (other than in oil and some commodity prices), because the consumer has very little capacity for additional borrowing to support consumption and therefore wages and prices. This is where I get a little lost and would appreciate the incisive anyltical skills of the board.
Robert Cote-
I have the exact same criteria set up on my firewall and Yellens speech also somehow passed through!
Don-
you are correct, I was sent the link with the comment 200bps and posted before I read the piece.
Thus, the Fed needs to ease and will ease, substantially I firmly believe, not to bail out Wall Street but to make certain that weaker growth on Main Street does not morph into recession, which would carry serious debt-deflation consequences
Roundtable on the consequences
I can't figure out if i'm for or against debt-deflation...
i don't have any.. NONE
is that good for me in that scenario , or bad
I happen to agree with her assessment....it will be a brave new world out there for any loan that is not a GSE deal. And the economy will take a hit for this foolishness too.....the magnitude of the hit is still in question - might be recession-type hit or something less.
But a big slowdown is in the works for sure.
And Mock Turtle - are you on the wrong blog??
I guess we're making progress when Fed governors are beginning to state the obvious.
She doesn't look like she's slept much.
I have the exact same criteria set up on my firewall and Yellens speech also somehow passed through!
There must be a hidden meta tag about a chick with no balls and no clue.
Seriously, this week's concern seems to be PCE. This is one of those datums that the Fed gets to see sooner and better than the rest of us cellar cubicle troglydtes. I'm thinking they are seeing a reluctant consumer and the Grinch stealing Christmas. Add to that mortgage lenders are exceptionally exposed to rapid employment losses due to the persistent low/negative savings rate. People don't have any liquidity and credit is going away.
So what will the Fed do if the war in the Middle East starts up again with Israel vs Syria this time?
Um, gas is now $4, but there is no inflation?
Rock and hard place time viz 1973;-}
Someday this war's gonna end...
.....the magnitude of the hit is still in question - might be recession-type hit or something less.
But a big slowdown is in the works for sure.
It's funny how we've gone from a pre-Greenspan economy where a recession was just a routine annoyance, to a point today where it's some unthinkable sort of cataclysm that only occurs in the most unusual circumstances.
I don't think that bodes well for how we're going to react to adversity. Everybody knows we've been bad, and nobody wants to pay.
So what will the Fed do if the war in the Middle East starts up again with Israel vs Syria this time?
Um, gas is now $4, but there is no inflation?
Rock and hard place time viz 1973;-}
Someday this war's gonna end...
I think something getting more expensive has nothing to do with inflation or even prices for that matter. Otherwise how can Japan have deflation while China has serious inflation? Don't they get their gas from the same places?
And Mock Turtle - are you on the wrong blog??
JR in Big D | 09.10.07 - 1:54 pm | #
If I strayed to far OT I apologize to all.
I thought that the strain of gov indebtedness relative to ongoing war costs, the apparent sabotage of a major oil pipeline on our southern boarder etc was a related, all-be-it tangential consideration, as the Fed tries to cope with a financial crisis.
I will now withdraw to my shell.
Why the price of most things will be going up with a Fed rate cut...
Dollar index quote [INO.com]
Maybe Yellen hasnt read this advertising supplement from the LA Times. She is such a bear.
From Standard Pacific Homes:
Yes, the time to buy is now!
Many people are apprehensive about todays housing market. Is now a good time to buy? If youre wasting money on rent each month or have outgrown your current home, the answer would be a simple Yes! Although the need for more space or the simple desire to own are motivation enough, there are also other reasons why now is the perfect time to buy.
First off, interest rates are still at a historic low. Although theyve gone up a bit in recent months, theyre still much lower than they were ten years ago. Nows your chance to get an affordable rate before they zoom back up. Secondly, home ownership gives you a considerable tax break. In this sense its actually more affordable each year to own rather than rent. Lastly, owning gives you the freedom to personalize your home and make it your own. And with that comes a certain sense of pride, accomplishment, and peace of mind.
Is it good when builders use words like zoom to describe future mortgage conditions? Um, doesnt renting avoid property taxes in bubble states?
I haven't heard anyone in the main stream press talk about the dollar falling below 80.
I have heard Schiff and others call this a significant event that could send the dollar down fast..
Anyone know if and why it's not even discussed?
CNNMoney.com has this headline:
"Fed's Yellen says don't bet on cut"
Funny, I read her speech as slightly to the easing side of neutral. Seems like there was a lot of time spent justifying a quick change away from the recent on-guard-against-inflation statements...
Yellen states the obvious point that the house price to rent ratio (the P/E ratio) has NOT fallen much, and further drops in prices are likely if the price to rent ratio is to return to historic norms.
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
"I thought that the strain of gov indebtedness relative to ongoing war costs, the apparent sabotage of a major oil pipeline on our southern boarder etc was a related, all-be-it tangential consideration, as the Fed tries to cope with a financial crisis."
I will now withdraw to my shell.
mock turtle | 09.10.07 - 2:21 pm |
This certainly worries me. Mexico is consistently in the top four countries we import oil from and last I checked the economic prognosticators were consistently worried about the price of gas and the consumer. I know the war is a "political" issue but it has to be funded somehow and currently we are doing it on credit. . .and credit is becoming more expensive. Pretty much all the historical precedents for such situations are bad.
There has to be more than a few people out there that worry over "just" the economics of this situation, politics and ethics aside.
I wish withdrawing into a shell could protect us from this mess.
A couple of comments:
Average Joe,
Maybe when the index hits its all time low of 78.19, reporters might start to take notice. Until then its all how bad britneys performance was last night.
"Are you liquid?"
"Volumes fallen below 205bn per day?"
"Expenses gone up?"
" Market gone and changed on ya real sudden like?"
"Didn't see sumthin' comin?"
"Need a few billion holdover while you shuffle payments?"
"So-called friends not anserin' the phone no more?"
Call 1-800 YELLEN for nice wet one...
Please don't withdraw into your shell, Mock Turtle.....I do see your point. However, if we had no Iraq expense, I doubt we would have avoided the current liquidity problem we have today.
The mortgage industry has a history of shooting themselves in the foot. This time, it looks like the rating agencies and investment houses were holding the gun and helping the industry take aim. But the aim was a bit off and it looks like more important body parts were hit......and the bleeding hasn't stopped yet.
What Yellen is saying is that once the bleeding has stopped, chances are none of the participants in the current crisis will pick up a gun again for a long time.
Yellen states the obvious point that the house price to rent ratio (the P/E ratio) has NOT fallen much, and further drops in prices are likely if the price to rent ratio is to return to historic norms.
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
Peterbob
And as I listen further, she says that price growth in owners equivalent rent will moderate. And this is based on actual rents observed.
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
This to me is the most powerful guide to future house prices: How much do prices have to fall in order to remove the massive increase in the price to rent ratio that we've seen over the last five years.
Page 3 of Shiller's paper presented at Jackson Hole is one indication:
http://www.kansascityfed.org/publicat/sympos/2007/PDF/2007.08.01.Shiller.pdf
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
Well, I sold my last rental sfr in Apr '06 to my own listing realtors who thought that rents would . They raised the rent, lost the tenant and have it back on the market listed as an agency exclusive. I can't wait to see the wishing price.
Look, people can't afford their lifestyles. That simple. They won't discard the Audi, the jet ski, the Tahoe timeshare, the Cabo vacation and Prada in reverse order. They will cut everywhere and also be stuck paying for those luxuries and thus have little left over for things like food and shelter.
I got out not just because the rent/sales ratio went above 250 but because in Apr '06 the only people renting were people who couldn't get 100% LTV I/O neg-am toxic mortgages. I wouldn't let these people know where I live nevermind take custody of a quarter million dollar depreciating asset.
For rents to rise substantially, the new renters are going to have to get money from somewhere. If they aren't selling houses to each other any longer, where will it come from?
Still no sound. Not sure what you are doing wrong but many of these videos have no sound.
Mock Turtle,
I echo your concern. And now that Mexican truckers are moving freely on American highways, I suggest that concern is warranted.
martv,
I recommend a post by Mish Shedlock at:
Mish's Global etc.
Scroll down to the "Crisis in asset backed commercial paper" post and don't skip the comments. Mish makes a strong case for deflation and the inability of the Fed to inflate away the credit crunch.
Conclusion: "Credit booms do not end in inflation as most people believe. Credit booms are inflation that end in deflation. This credit boom is not any different."
The economy is already in a recession and she is just talking about the risks!
NC Jim,
Read Mish's post yesterday -- did you see that chart? YOWZA!
I hung on to my SFR rentals as an inflation hedge. Colorado Springs has been a little bubbly but not extreme.
aka.... duuuuhhhh!
Did Yellen grow up in the Chicago area? She sure has the accent...
The Fed is busy building negative credibility.
On the 100% way up the speculative ladder, it's not their job to detect asset price bubbles. But give a 5% drop and they worry about the effects on spending and systemic risk. Something has to give here.
Unfortunately, it appears that will be the value of the dollar.
I love the quote that "innovations might not have spread risk as effectively as we thought". You mean Wall Street's shell-game innovation didn't remove risk from the $0 down $720k loan to the $15k a year mexican fieldworker laboring in Janet's backyard?
I am afraid these guys really are complete bozos.
Basel bank watchdog eyes new risk charges
By Thomas Atkins
BERNE, Switzerland (Reuters) - The world's top banking authority, the Basel Committee, is considering new capital charges that could discourage some of the risky behavior behind the current credit crunch by making it more expensive.
None of these issues have taken the Basel Committee by surprise, Zuberbuehler said, but simply designing and implementing the new capital-charge rules proved cumbersome and provoked "regulatory fatigue" among the banks. And that led the committee to delay some measures on liquidity.
"Everybody agreed that the liquidity issue was the next big thing after the capital issue," Zuberbuehler said. "(But) you can't have too many hats in the air at the same time."
REALLY? You think that allowing every tom, Dick and Harry to pile into stuff they couldn't figure out and can't price, you don't think that having a conservative stance towards holding this stuff as reserves might be a good idea at 1st?
Addressed to those here who foresaw the credit collapse, not just the housing market bubble:
What next?
A few things that were co/written by Janet Yellen. Of particular currency: Stabilization Policy: A Reconsideration. And an exhibit for the case that reality is forever f!cking up one' good work: Policymaking on the FOMC: Transparency and Continuity
According to wikipedia, she's from Brooklyn, not Chicago. Haven't listened to the video yet, but I must say the two accents are pretty distinct to my ear. (I'm from one place and lived hard by the other for many years.)
After her speech lunch consisted of lobster bisque in a rate reduction, argula salad with Golden Ball pears in a yogurt apple cider vinegar dressing. Bologna stew in a deep do do tomato broth spiked with tiny tidbits of steak tartare (trim and grind the red meat twice). Roasted stock market potatoes with a few drops of Tabasco sauce. Choice of dessert.
I was in another room so I only heard and didn't see her when they had an excerpt from her speech on TV.
She sure sounded a LOT like Abbie Joseph Cohen, both accent such as it is and also the slow measured speech with eerie robot like pauses within words.
Weird.
-K
G-Ray I have enjoyed your comments lately over at Mish's site, thanks.
Whats next? Noting the textbook reversal today I would like to think the glass is half-full. As for the news about Mexico and their pipelines, astute timing.
Time for the Feds. to do their part in the interest of NATIONAL SECURITY!
Dont see Abbie on much lately do you?
I'm sure there is a contrarian "mind-fuck" play there somewhere....
What next?
GaudiaRay
State and local government fiscal chaos.
NY Times 9/11/2007
Fed Officials See Threat in Housing Turmoil
ttp://www.nytimes.com/2007/09/11/business/11fed.html?_r=1&ref=business&oref=slogi
Fleetwood Mac - Over My Head 1997 Live
YouTube
- Fleetwood Mac - Over My Head 1997 Live
And as I listen further, she says that price growth in owners equivalent rent will moderate. And this is based on actual rents observed.
Is there anyone out there still claiming that the price to rent ratio will come down due to increasing rent rather than decreasing price?
The real question is the extant to which the mania-driven overbuilding will cause real rents to FALL because of an oversupply of housing. Condos, where the rental supply is most comparable to the purchase supply are likely to be HAMMERED. I would be surprised if condo prices DIDN'T lose 50% in overbuilt markets.