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Looking like a slow-motion slowdown ..
It doesn't look like deflationary prices will continue given the current crude oil prices, but lately that is a volatile series. If housing continues to crater will a drop in demand for fuel have enough bite to create an oversupply condition once again? Not in this quarter but, I think that is quite likely...provided the Middle East does not escalate.
I share the sub-performing GDP view here, expecting 2006q4 "final" to settle below 2% as we accept the reality of how large the sinking housing market is on this economy.
Tanta, OT. What is the "seasoning" period for ARM loans considered to be? Is it different for the Pay Option variety?
Is it possible for a loan that sours on a lenders' books or in an MBS a putback candidate to the originator beyond those considered EPD?
I went to Home Depot the other night...I swear I thought I was attending a Funeral...dead no wait, no lines, great parking spot...that about sums it up.
bfatz, What are you doing. I thought everyone knew to not go to HD. If everyone decides to go I'm through. You're spoiling my short.
This inflation chart over at the Cleveland Fed sure is interesting... it looks eerily similar to that retail sales data. Also notice how there are two big bumps corresponding to the asset bubbles we have.
If I understand the data correctly it tells me two thing:
1) We should still see inflationary pressures continue even into a recession, but then fall off sharply in the aftermath.
2) This time we might be starting downard from a lower level. It makes me think deflation is a legitimate concern.
Also note how the heigh of those two bumps correspend closely with the relative peak in the fed funds rate.
Odd...
What is CFC doing now:
Yahoo! Message Boards -
Can someone explain ?
Saw a lot of reaction to an earlier thread, that could use some clarification on my part:
BB was brought on because he's considered an expert in deflation fighting. I guessed he would lower rates precisely because he'd rather have some positive inflation than the alternative.
If he lowered rates, unfroze the entry level of the housing market as a result, and got some positive inflation that he could chase (and stay a percent or two behind, while pretending to want to catch it), I suspect he'd be one happy puppy, because the alternative is deflation, imho. He needs to devalue the dollar (which will eventually break the various currency pegs), then lag behind the inflation curve (which will slow the nominal price drop of housing while the real value realigns with long term averages) until he reaches the desired goal: US wages equalized with global wages. He will wait for that first sign of wage inflation (which could be a long time in coming), then pull a Volcker by jumping well ahead of rates to end the party. Think of it as a Betty Ford program, for the entire country.
CR, spectacular job with this post!
If you thought sub-prime is dead ?
No it is just 95% LTV now:
Mortgage Grapevine: WHATS THE NEW MININUM FICO FOR 95%LTV STATED? Thanks in Advance!
BTW, BB doesn't need to defend the value of the dollar outside the country...he needs to explicitly break it down (the pegs). And since all of the US debt is in US currency, he doesn't have to worry about any impact within the country - the sole "problem" would be more expensive imports, but cheap imports is actually part of the problem. The end result, once wages equalize is that we start ramping jobs up again because imports will no longer be cheap enough to service our own economy.
The wild card is that the Chinese and other peggers may simply continue to force feed us into depression with our own dollars. Think of that as the foie gras response to our probable policy.
It's going to be interesting...
I guessed he would lower rates precisely because he'd rather have some positive inflation than the alternative.
I think the Fed raised rates to prevent deflation not inflation and they'll only begin lowering rates once it looks like most of the speculation, ponzi finance, and hot money flows are doomed (we may be approaching that point now). All the inflation talk has been partly a ruse (though I suspect some members buy into it), because Ben can't go talking about his real beliefs or intentions. That might rattle some nerves.
"got some positive inflation that he could chase "
"US wages equalized with global wages. "
Not sure I understand.
If there is inflation due to high $$$ - how can people have enough to pay mortgages ?
and if inflation is both in CPI but also in wages - this would push home prices even higher and we are back where we are today just at a different level of nominal prices
what am I missing ?
Look like we are heading into recession unless BB starts to lower interest rate. Which way he leans toward -- inflation or deflation?
My guess would be that the Fed rather has inflation as oppose to deflation (regardless of all the tough talk). My question is how far do they want to risk the dollar currency?
Any thoughts?
Oh my, deflation, how odd ...
CR, I might be confusing things here, but with this drop off in consumer spending in 2006 Q4, and now probably in 2007 Q1, how much are you still buying the Fed's argument (from Kohn's statement in your original post) that the drop in PCE/inflation is due to one time factors (e.g., price changes, such as the drop in the price of oil) and thus is not disinflation/deflation? I got the impression that you are starting to lean more towards the drop in prices being due to a slowdown in overall consumer spending and demand.
And secondly, are you thinking that this trend will continue, with the drop in MEW and housing/sub-prime meltdown? (I'm also assuming that if this reversal in the nominal and real PCE having not happened in the last 50 years it is potentially not a good omen for the future. From what I've seen "tail" events that don't happen often typically are, by definition, bad news.)
LEND class action
Expired
How will these two factors affect interest rate decisions:
Okay, upon further review I think I'm just confused and revealing my ignorance. Strike that "drop in PCE/inflation" from my last post as the PPI/CPI seem to have risen. How does one then reconcile falling one time prices leading to real and nominal PCE inversion and a rising PPI/CPI?
This is just one paragraph, the others are too lengthy to list at the bottom of the release, but, this performance is beyond comprehension in some cases;
"The mortgage loans consist of fixed- and adjustable-rate, 15- and 30-year mortgages extended to subprime borrowers and are secured by first and second liens, primarily on one- to four-family residential properties. As of the February 2007 distribution date The pools are seasoned between five (2006-HE6) and 79 (2000-1) months and have pool factors (current collateral balance as a percentage of the initial balance) ranging from 4.37% (2000-1) to 92.62% (2006-HE6). The 60+ delinquencies range from 8.07% (2006-1) to 49.58% (2001-NC4). "
MarketWatch.com
There will be a lot of differences between the growth of Q4 and Q1 of this year.
-PCE added 2.88% to growth (that will come down)
-Net Exports added 1.5% to growth (that's looking flat in Q1)
-Residential Construction subtracted 1.2% on growth in Q4 (that should be less of a drag in Q1)
-Inventories subtracted 1.35% from growth in Q4 (this will probably be flat or add some growth in Q1).
There's a lot of data left to go, but I think growth could come in anywhere between 1.6% to 2.4% GDP. March is pretty important. 50% of retail activity for Q1 typically occurs in March.
Novastar layoffs;
MarketWatch.com
Andrew, the unusual event in Q4, real PCE greater than nominal PCE, is probably best viewed as one time event - at least for now.
Best to all.
OT: Some interesting research on Housing Market and the Domestic/Global Economic Outlook from PIMCO's site.
Housing
PIMCO - In Focus- March 2007
"Outlook for 2007:
PIMCO expects the housing slowdown to continue in 2007 with a steeper decline in home sales than for home prices. New home prices should fall the most since they appreciated the most relative to existing housing during the run-up in prices. Attempts by homebuilders to reduce heavy inventories also will put downward pressure on new-home prices. The National Association of Realtors index, which tracks median home prices, should fall by 4-5% in 2007. The OFHEO index tracks repeat sales and PIMCO expects it to decline by over 1% this year (new home sales have little impact on this index).
The slowdown in housing should drag GDP down by approximately 1% over the next several quarters. Due to the multiplier effect that a slowdown has on consumption, it is likely that the impact on the economy will be even more substantial.
We expect the problems in the subprime market will result in continued consolidation of lenders, as the weaker players are not able to sustain loan production volumes or meet the tighter standards that are currently underway. Due to this consolidation, we expect to see subprime issuance decrease dramatically in 20072008. Much contraction has already taken place as year-to-date issuance has dropped nearly 10% compared to 2006 at this point in time. We envision a credit squeeze among low FICO, high loan-to-value and first-time homebuyers who are used to liberal credit standards.
It is likely that the poor performance we have seen in subprime loans will carry over to some degree into the most aggressively underwritten loans in the Alt A and possibly Jumbo prime markets. We do not believe prime loans will be materially affected. The pronounced problems in the subprime market will not disappear as quickly as they emerged; instead we believe it will be a long process that will take perhaps years to correct."
Domestic/Global Outlook
PIMCO - McCulley Cyclical QA 3-07
"Q: Why might the tightening of credit in the sub-prime market have a contagion effect?
McCulley: A tightening of underwriting terms is an intensely corrosive factor to leverage-fueled asset appreciation. Levered animal spirits are the stuff of boom, and when bankers tighten lending standards to levered speculators, liquidity becomes a mirage. At the end of the day, liquidity isnt about money stock growth, but a risk-seeking state of mind."
"McCulley: To sum up our outlook following the March Forum, we are looking for a global soft landing, with some degree of decoupling of growth across the regions and with generalized, modest disinflation. We are also looking for convergence in global monetary policy, as the Fed reverses to easing and the rest of the world brings tightening campaigns to a
We are also looking for convergence in global monetary policy, as the Fed reverses to easing and the rest of the world brings tightening campaigns to a close, going on protracted hold, even if not joining the Fed in reversing policy. That configuration implies weakness for the dollar, perhaps quite precipitous at times.
More broadly, it remains a risk-management world, both for global central bankers and PIMCO. A global soft landing is the most likely scenario, but the predominant alternative is a harder landing, led by the United States, as the rot in mortgage finance smells up the joint, infecting other sectors, notably consumer spending. That doesnt happen very often, and it is never wise to bet against the U.S. consumer for very long. But never has the U.S. consumer been so broadly levered to an overvalued asset like the U.S. property market, on the back of Ponzi financing schemes."
Sorry, the Anon above was me.
Thanks for the response above CR, I was kind of figuring I needed to step back, seriously review my economics fundamentals, and not worry about the PCE as obviously the PPI/CPI are what matter to consumers in the end. Still, despite my bearish paranoia, it sounds like you're viewing the real/nominal PCE inversion as a one time quirk (e.g., "Oh look, a paisley winged wood duck, you don't see those often.") and not as a harbinger of a shift in underlying consumer fundamentals.
This was me - Anonymous | 03.16.07 - 5:52 pm
curse you, halo scan...
No...actually they lowered the prime rate to 1% to avoid deflation. They raised it when the party was ready to burn the house down (unfortunately they didn't get as much inflation as they hoped during that time)...and now that the police are starting to put party-goers in paddywagons, they are going to try to restart the housing party with lower rates to keep the door charge revenue from dropping to zero.
McCulley comes close to kid banker Warsh with this:
At the end of the day, liquidity isnt about money stock growth, but a risk-seeking state of mind."
Well, I'm always interested in these (philosophical extensions? bond king insights?) connotations about what liquidity is and isn't. [Warsh: liquidity is confidence].
Seems to me tons of under-compensated people (see, this is the philosophical extension of 'obscene CEO compensation') have risk-seeking states of mind and demonstrated that so convincing with the growth of subprimes and Alt A lending. Now that they're ready to diversify back into the stock market, gold, commodities, futures...anything but real estate, nobody is going to lend them the dough...too risky.
But HFs and LBOs, a different story.
At the end of the day (hey, it was that or "when all is said and done")
liquidity crisis: redistribution into fewer hands.
unlike a book or video you cannot skip to the end and see the answer.
so we must wait and see
No...actually they lowered the prime rate to 1% to avoid deflation.
RP, that's not inconsistent with what I'm saying. The Fed is desperately trying to avoid deflation with both rate cuts and rate increases. The problem is that the previous rate cuts stimulated excessive borrowing for consumption and more asset bubbles. Long-term these are deflationary forces - this outcome was unwanted; I believe the Fed realizes this now and understands that rates have to be risen enough to purge any excess borrowing and speculation which they didn't do last time around.
I think a double dip recession in 2001 and 2003 may have been better than what we have coming now.
Feb plant capacity utilization was up to 80% while some of this is related to a higher rate of utilities usage during the cold weather it still is a pretty strong showing. Based on these numbers I would have expected stronger wage gains, stronger consumer spending. Maybe manufacturing has become such a small slice of the economy that plant utilization doesn't mean as much.
Excellent job, CR, as always. Thank you.
I dunno ron
Based on these numbers I would have expected stronger wage gains, stronger consumer spending. Maybe manufacturing has become such a small slice of the economy that plant utilization doesn't mean as much
It's not that it is a declining slice in terms of #s of employees (that has been going on since WWII), it's that the employees have increasing less pricing power and no job security. Consider Chrysler and GM today asking for further wage concessions. Did the new Ford CEO get asked? Unheard of. Unthinkable. Extraterrestial. But not in some other countries...
Plant Utilization stats have less meaning now that foreign branch plants can add/subtract volume according to profit maximization, no?
Last thing. It's pretty interesting that Roach keeps his company's role as an important financial investment company and catalyst for this housing boom out of his piece. Maybe he remembers that Xie got fired.
ac - I agree with your last post in it's entirety.
Wonderful post, as always, CR.
realist, before you get too freaked about this:
The 60+ delinquencies range from 8.07% (2006-1) to 49.58% (2001-NC4).
remember that that's why you're given the pool factors (percent of original pool balance still outstanding). The DLQ are measured on the current balance of the pool, not the original balance. So 2001-NC4 may have a current balance that is only 5% of its original balance. Of that 5% remaining, half are 60+ delinquent. All old pools get like that, as the bulk of the pool prepays via refinance, borrowers moving, or loans foreclosed (a foreclosure is a payoff to the pool), and what is left are borrowers who can't prepay (because they're delinquent and can't find another lender to take them out) or are in the process of being foreclosed. The DLQ rate is expressed as a percent of current pool balance because that is what an investor is buying today: a small remaining aged pool with half its loans delinquent. But this figure doesn't tell you what the overall rate of delinquency was for the original pool balance.
Using the CPI overstates the weakness in real retail sales.
As on January the y/y change in the BEA deflater for retail sales was -0.3% versus 2.0% for the cpi.
This divergence is normal because services and housing usually have
higher inflation rates.