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Tilting at Windmills

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February 15, 2008
By: Kevin Drum

ECONOMIC UPDATE....The New York Times reports the latest batch of bad economic news:

The price of imports rose 1.7 percent in January and was up 13.7 year over year, the highest annual rate since the Labor Department records began in 1983....Manufacturers' woes were reflected in the Empire State Manufacturing survey, a measure of business conditions in New York State. The index fell in February to -11.7, its lowest reading since April 2003....Meanwhile, a closely watched measure of consumer confidence, the Reuters/University of Michigan survey, fell to 69.6 in February, the lowest reading since February 1992. It had stood at 78.4 in January.

Meanwhile, here in Southern California where I'm typing this, median home prices are down 18% from their peak and home sales are at their lowest level since records started being kept. And the Fed? They're lowering interest rates but it doesn't seem to be doing any good.

Blecch.

Kevin Drum 1:39 PM Permalink | Trackbacks | Comments (46)

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The price of imports rose 1.7 percent in January and was up 13.7 year over year, the highest annual rate since the Labor Department records began in 1983

Let the dollar become ridiculously overvalued (6+%/GDP trade deficit) and express amazement when it comes down.

Of course it hasn't really come down relative to the Chinese yuan (which is effectively pegged and manipulated by the Chinese Communist government) but hey, that's the "free market" at work.

Posted by: alex on February 15, 2008 at 1:44 PM | PERMALINK

I'm hedging by investing in the entire self defense/ammunition supply chain.

Posted by: jerry on February 15, 2008 at 1:49 PM | PERMALINK

It's funny how much economics has to do with psychology. I love watching these inflated Fed chairmen learn that the strings they're holding aren't really connected to anything solid.

Posted by: Russell on February 15, 2008 at 1:50 PM | PERMALINK

Oh, yeah, this has a lot to do with the "free" trade that Kevin Drum and almost all "serious" MSM pundits dogmatically defend. Apparently manipulation by foreign governments is part of "free" trade in the "free" market.

And of course the trade (current account) deficit provided much of the money that funded the housing bubble, but that gets conveniently overlooked (wouldn't want to give the barbarians a way to question the "free" trade dogma).

Too much China policy criticism? Ok, Japan does it too. And the latest thing is sovereign wealth funds, largely from oil exporters (anyone remember the petro dollars of the 1970's?).

All this stuff is about as surprising as the fact that the sun rose in the East today.

Pssst, wanna buy some tulip bulbs?

Posted by: alex on February 15, 2008 at 1:53 PM | PERMALINK

The Market works, Commie!

Posted by: Gore/Edwards 08 on February 15, 2008 at 1:57 PM | PERMALINK

Blecch.

What's "blecch" about bubbles bursting and housing becoming affordable again?

Posted by: Disputo on February 15, 2008 at 2:05 PM | PERMALINK

Well, duh? Have you seen the price of a dollar on the global markets lately? The Canadian dollar is now surpassing the U.S. dollar. You just can spend your national treasure on taking over other countries ad infinitum to the tune of over $1B a day and expect your economy to stay strong.

The Fed's only fix (lowering interest rates) is not going to work this time. Liquidity is drying up as evidenced by long-term bond price rises. Hello stagflation!

Posted by: CB on February 15, 2008 at 2:08 PM | PERMALINK

Isn't the whole point of devaluing the $ is to raise import prices so that our consumers will buy less of them and more domestically produced goods?

Posted by: pgl on February 15, 2008 at 2:12 PM | PERMALINK

keep clapping, dammit!

Posted by: thersites on February 15, 2008 at 2:13 PM | PERMALINK

"median home prices are down 18% from their peak and home sales are at their lowest level since records started being kept. And the Fed? They're lowering interest rates but it doesn't seem to be doing any good."

The lowered interest rates aren't helping home sales because the banks are funding only about 25% of the loans which would have gone through before the bubble burst. Banks have to keep more assets in reserve to back up their loans, and they don't have it.

Posted by: Myrna on February 15, 2008 at 2:15 PM | PERMALINK

Well, at least they're still providing some information. They are also trying to shut down ready access to some economic data.

Posted by: PaulB on February 15, 2008 at 2:28 PM | PERMALINK

I'm with Disputo: housing prices are insane, and they are still insane. They probably need to fall another 30% before they start to be affordable in places like California.

Commenters on this frequently act as though the collapse of the housing bubble is the problem, when the actual catastrophe which is the bubble itself, which was inflated by the ridiculous loans being made during the last few years. Disappearance of the stupid loans is causing, as you might expect, collapse of the bubble.

Collapse of the bubble should be thought of as the inevitable consequence of the bubble, rather than as a bad or good thing in itself...

Posted by: Alex R on February 15, 2008 at 2:28 PM | PERMALINK

since i have money in certificates of deposit the lowered interest rates end up hurting my economy,
and i never borrowed money under risky circumstances either.
bah!

Posted by: dj spellchecka on February 15, 2008 at 2:44 PM | PERMALINK

Isn't the whole point of devaluing the $ is to raise import prices so that our consumers will buy less of them and more domestically produced goods?

Except no goods are produced domestically any more...

Posted by: Juanita de Talmas on February 15, 2008 at 2:45 PM | PERMALINK

The Fed is expected to lower interest rates between 50 bps and 100 bps at the next meeting.

I wonder if it will do any good.

I wonder if the dollar will crash

Posted by: neil wilson on February 15, 2008 at 2:45 PM | PERMALINK

Of course the dollar will crash. I think you should stock up on ammo.

Posted by: jerry on February 15, 2008 at 2:47 PM | PERMALINK

Alex R, of course bubbles collapse. that doesn't make it a good thing (any more than a bubble is a good thing, other than for those who get theirs and get out). the actual amount of home equity today among those with mortgages is quite modest (roughly 32%), and if housing prices keep falling, more and more people will simply walk away and live with the damage to their credit ratings....

in short, the consequences have the potential to be horrible.

as for the broader point, i've said, here and elsewhere for years, that the logical outcome of bush league economics is stagflation lite.

right on schedule....

Posted by: howard on February 15, 2008 at 2:48 PM | PERMALINK

As someone who doesn't own a home, I'm loving every minute of this downturn.

Posted by: Justin on February 15, 2008 at 2:58 PM | PERMALINK

jerry,

Of course the dollar will crash. I think you should stock up on ammo.

I know you are joking but I must admit that even though I have never owned a gun in my life (fishing is much more my style than hunting is) I've been thinking it might be about time to get one. Two, actually, a shotgun and 9mm pistol. My kids are grown so I'm not worried about them playing with the guns. I'd still get trigger guards though.

Posted by: Tripp on February 15, 2008 at 3:12 PM | PERMALINK

And the Fed? They're lowering interest rates but it doesn't seem to be doing any good.


Russell hit it on the head when he mentioned the Fed holding "strings."

The Fed's primary tools are like strings. They work when you pull on them. They work when there's tension on them and you release a little. But if there's nothing pulling at the other end, it doesn't do any good to relax. You can't push a string.

Posted by: bleh on February 15, 2008 at 3:14 PM | PERMALINK

howard, I'm partially in agreement with you: the consequences may be quite bad, but they should be thought of as consequences of the *bubble itself* rather than the inevitable collapse of the bubble. But keeping the bubble going is not a good option either: I think that the consequences of the housing price-to-income ratio remaining as high as it is now would also be quite bad.

Probably the best possible outcome at this point would be modest further declines in housing prices coupled with enough wage inflation to bring incomes up to make housing affordable again. This would, I think, spread the pain around between lenders and borrowers.

Posted by: Alex R on February 15, 2008 at 3:25 PM | PERMALINK

Bailing banks out, so they don't have to take possession of the houses they're about to foreclose on, keeps the housing bubble going. Let it pop.

The banks don't want the houses either. Consumers hurt themselves with the plans floated by the Dems and Repubs. They should walk away. Banks aren't offering you a life preserver out of philanthropy.

Posted by: luci on February 15, 2008 at 3:25 PM | PERMALINK

As someone who doesn't own a home, I'm loving every minute of this downturn.

Don't spend too much time just loving it. What do you think will happen to rents when all the former house owners start competing for the available rental stock? Best to save some cash for that down payment in about 18 months, depending on your local market.

Posted by: Disputo on February 15, 2008 at 4:00 PM | PERMALINK

Isn't the whole point of devaluing the $ is to raise import prices so that our consumers will buy less of them and more domestically produced goods?
-pgl

Actually the good part about a lower dollar is that it enables domestic manufacturers to increase sales and output for export. The BIG problem is importing oil. Every time they reduce interest rates, the dollar goes down and oil goes up. That just removes more disposable income from your pocket every week. Banks get propped up, but consumers get screwed. I've noticed that flat panel TV's have stopped getting cheaper for quite some time now.

Posted by: Doc at the Radar Station on February 15, 2008 at 4:01 PM | PERMALINK

Alex R, past performance (which, of course, is no guarantee of future results!) suggests that housing prices are sticky and most of the price decline will be in the form of nominal prices staying flat in the face of inflation, leading to a real price decline, but this was no ordinary bubble, to be sure.

and the fed has pretty much conceded that at this stage, given the systemic risks that abound, it's ready to live with a little inflation in the hopes of avoiding japanese-
'90s style stagnation, and it'll deal with tomorrow's problems tomorrow.

which is to say that you and bernanke (and, for that matter, me) are, in the face of the painful necessity of the bubble collapsing, are on the same page....

Posted by: howard on February 15, 2008 at 4:14 PM | PERMALINK

We just need to give more money to people who are already in debt up to their eyeballs, and get them to buy more stuff they don't need, and all our problems will be fixed.

Whip the consumer zombies a little harder, gotta keep them moving.

Posted by: Speed on February 15, 2008 at 4:29 PM | PERMALINK

Don't spend too much time just loving it. What do you think will happen to rents when all the former house owners start competing for the available rental stock? Best to save some cash for that down payment in about 18 months, depending on your local market.

What, you think all those housing the former owners move out of just *vanish*? They either get sold at much reduced prices (moving people out of the rental pool), or they get turned into rental themselves.

I have no fear of my rents going up.

Posted by: tavella on February 15, 2008 at 4:42 PM | PERMALINK
Meanwhile, here in Southern California where I'm typing this, median home prices are down 18% from their peak and home sales are at their lowest level since records started being kept.

On a related point, saw a headline today that SF Bay Area home prices are at a 20-year low, and that 20% of sales in the area are foreclosures.

Posted by: cmdicely on February 15, 2008 at 5:06 PM | PERMALINK

Learn to grow greens, raise rabbits and pirate satellite transmissions. The depression is going to last a lot longer than 18 months.

Posted by: Brojo on February 15, 2008 at 5:15 PM | PERMALINK

Speed wrote: "We just need to give more money to people who are already in debt up to their eyeballs, and get them to buy more stuff they don't need, and all our problems will be fixed. Whip the consumer zombies a little harder, gotta keep them moving."

Unfortunately, you have accurately encapsulated the US economy in a nutshell. Like the nutshells that are used in the good old "shell game" con.

Posted by: SecularAnimist on February 15, 2008 at 5:40 PM | PERMALINK

keep clapping, dammit!

Posted by: thersites on February 15, 2008

Hard to clap when price of groceries and gas is costing an arm and a leg.

Posted by: optical weenie on February 15, 2008 at 6:45 PM | PERMALINK

They either get sold at much reduced prices

Duh. That's exactly what I said.

(moving people out of the rental pool)

Yeah, everytime someone purchases a second home, people move out of the rental pool....

or they get turned into rental themselves.

Or they sit vacant for months.

It takes time for the market to readjust. You're apparent belief that the market is perfectly efficient would preclude the existence of bubbles in the first place, which is clearly contradicted by reality.

I have no fear of my rents going up.

Uh, they're already going up, and the only new construction of any note are rental props. During the bubble, rents fell as people moved into home ownership. Why anyone would think that the opposite isn't happening now is beyond me.

But, hey, if you want to sit this out and lose money, then go right ahead.

Posted by: Disputo on February 15, 2008 at 7:08 PM | PERMALINK

Housing prices in my area (central Mass.) are finally affordable for a first-time buyer, but I won't be in a position to even think about buying for at least a year (paying of other debts first). I'm hoping prices will be as good or maybe even better then. What do y'all think? Are they going to keep going down over the next year or so?

I guess I sound like Nero fiddling while Rome burns, but I had pretty much given up on ever owning a house, and now the notion that I can after all has me a bit giddy...

Posted by: Jess on February 15, 2008 at 8:27 PM | PERMALINK

jess, the three rules of real estate: location, location, location.

that said, in general, yes, houses will be more affordable (cheaper at least in real terms and likely a little in nominal); predicting next year's interest rates is trickier, since it's possible the market will wake up to the increased threat of inflation by then.

just keep doing what you're doing: pay down debt, build up a downpayment, because whether or not prices will be lower a year from now, they sure as hell won't be higher, and that's going to be true for a few years.

Posted by: howard on February 15, 2008 at 10:17 PM | PERMALINK

Tripp,

I understand, and yeah, I'm joking. But a lot of people do say that there is quite a deal of self-protection in the right shotgun, so yep, I've thought about that too.

Posted by: jerry on February 15, 2008 at 10:29 PM | PERMALINK

The Canadian dollar is now surpassing the U.S. dollar.

But that is hurting manufacturers in Ontario and Quebec big time. The dollar's rise was an awfully quick move up, 20% in a matter of six months.

The NYSE dropped the seventy year old short rule last July, too. That will have an effect, maybe even has. It seems like the world is being taken over by hedge funds, who make money going short or long. They don't care.

Posted by: Bob M on February 15, 2008 at 10:51 PM | PERMALINK

Except no goods are produced domestically any more...

I know you are joking. The last i looked the U.S. was the biggest exporter in the world. Exports - Paper products, Aircrafts, wheat etc etc. The problem of course is that it's also the biggest importer and the imports are much larger than the exports.

Now, the fed has done a good job given the lousy hand it was dealt. Essentially preventing a depression. We'll probably still experience a recession. And in bailing out the banks, financial institutions and wall street, we'll have price inflation without any rise in wages (or jobs). And the price inflation hurts the poor and middle class a lot more than the rich.

So what we really need is wage inflation which will require public works i.e. the government has to start hiring. And higher taxes on the wealthy in addition to repealing the Bush tax cuts.

Posted by: ppk on February 15, 2008 at 10:54 PM | PERMALINK

Howard--thanks for the advice!

Posted by: Jess on February 15, 2008 at 11:52 PM | PERMALINK

>"Except no goods are produced domestically any more..."

No is a big word. What's left the country is manufactured goods... electronics, textiles, clothing, appliances, furniture, steel, etc... all are now heavily dominated by foreign producers.

There are some goods still produced, primarily natural resources/raw materials/footstuffs... and a fair chunk related to automobiles and automobile parts production.

Posted by: Buford on February 16, 2008 at 11:49 AM | PERMALINK

I find this all very disturbing. What does one invest in?

I have some CD's and some money market funds (which have plunged). How does one protect one's money?

Would it help to buy Euros somehow (and how is that done?) Growth is in Asia, but this doesn't seem like a time to buy stocks.

ack!

Input would be appreciated.

Or would cash be good if maybe I could pick up a house later on? I'm in Los Angeles area-- think house prices will be lower in a year? I notice some people say "l8 months." Is that usually how long things take to bottom out?

And, yes, lowering interest rates is insane! It just makes for horrible inflation, which they're already lying about. I just cringe looking at prices at the grocery these days.

Posted by: Clem on February 16, 2008 at 11:56 AM | PERMALINK

Clem, it's impossible to give investment "advice" without knowing someone's circumstances (age, family situation, current assets, income and income prospects, life goals, etc.). what you might want to do is a little reading to learn more about the principles of good investing.

in my estimation, it's always best to start with the classics, so i'd say read ben graham's "the intelligent investor," then barton malkiel's "a random walk down wall street," then whatever version of andrew tobias' "the only investment guide you'll ever need" is currently available, and then look at the berkshire hathaway website and read the last 20 years or so of warren buffet's annual letters to shareholders.

this will give you a foundation to make intelligent decisions about your own money: remember, as buffet always tells us, you don't have to swing the bat. assuming you're relatively young, you have plenty of time.

btw, in terms of LA house prices, see in general what i said to jees at 10:17.

Posted by: howard on February 16, 2008 at 1:52 PM | PERMALINK

Wait just a cotton pickin' minute, there, Kevin.

Are you suggesting that after 8 years of tax cuts the economy is "blecch"? That we didn't cut taxes enough?? That Americans aren't spending enough/in debt enough???

Sure, thousands of people are losing their homes each week but lower housing prices is a good thing, right?

C'mon, turn that frown upside down! Don't be one of those nattering nabobs of negativism. Get with the program.

Posted by: pj in jesusland on February 16, 2008 at 7:58 PM | PERMALINK

Howard,

I did read your comments and have done what the guy above said he was trying to do.

Thanks for your book suggestions.

Are there any online lists where these things are discussed? You up for discussing? ;-)

Ok, thanks in any event. It would be neat if there was a WMonthly listserv or something for discussions (tho it might wind up being a lot of people shouting at eachother ;-o )

Posted by: Clem on February 17, 2008 at 4:13 AM | PERMALINK

A great time to turn the nation over to a novice.

Posted by: bob h on February 17, 2008 at 6:49 AM | PERMALINK

Inflation is coming, and that will hurt the economy severely.

Specifically, the price of food products are increasing radically.

I am responsible for oversight of grain options contracts for a moderate sized food manufacturer in cereals.

Wheat prices are up 20% from September contracts, which were similarly up over 20% from previous year's. Similar for all grains, and in fact, many grain contractors are currently defaulting on rye, barley and oat contracts.

The causes are multiple but include the decline of the dollar, which has the effect of favoring exports, and exacerbated by the federal subsidies for ethanol production, also exacerbated by federal subsidies for the use of acreage for legislated purposes. (Most of the federal subsidies are really floors, so the dollar amount of agricultural subsidies disbursed is greatly reduced.)

The subsidy for ethanol is a disaster, a federally created inflation. Because food products are a minimum necessity and also economically a inelastic commodity (changes in supply or demand effect the price out of proportion to the demand changes), subsidizing a preference for energy use for acreage is a mixed "blessing".

Posted by: Richard Witty on February 17, 2008 at 8:49 AM | PERMALINK

clem, it's difficult to find any actual online discussions of investments that take place in a civil and information-oriented context! still...

you might look at the "big picture" blog that money manager barry ritholtz runs for reasonably informed investment discussions and you should certainly be following "calculated risk" for all that matters on housing. reading the wsj online (i think it's almost all free) is also a must, and there are many good discussions on investing (there's a column by james stewart that appears weekly, i think, that is always useful, and there's one called getting started about getting going in investing that is very helpful).

and once you've read a little, barron's is the sports illustrated of the investment world and a must-read.

it's a never-ending quest for information, knowledge, and judgement, clem, so let me close by quoting ben graham: "adequate results are easier to achieve than most people realize; superior results are much hard to achieve than most people realize."

Posted by: howard on February 17, 2008 at 11:33 AM | PERMALINK




 

 

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