Archive for January, 2010

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Updates On Economic Indicators

Monday, January 11th, 2010

Here are some indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The ECRI WLI (Weekly Leading Index) was at 131.5 for the week ended January 1.  From the story in the link below: “‘With the WLI climbing to a one-and-a-half-year high, the U.S. economy is firmly set to strengthen in the coming months,’ said Lakshman Achuthan, Managing Director at ECRI.”

http://www.businesscycle.com/news/press/1685/

Fortune’s Big Picture Index was at 17.59 as of December 18.  This is at a level that is very near to the low of the data series; furthermore, as one can see, its gauge depicting “recession v. recovery” seems to strongly indicate “recession.”

http://money.cnn.com/magazines/fortune/storysupplement/recovery_index/index.html

The Dow Jones ESI  (Economic Sentiment Indicator) is shown to be at 38.7 as of December 31, having risen steadily throughout 2009 as shown here:

http://solutions.dowjones.com/economicsentimentindicator/

Here is the latest chart depicting the Aruoba-Diebold-Scotti Business Conditions (ADS) Index.  I wrote a blog post concerning this index on October 27:

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/

Lastly, although I have not discussed the Conference Board LEI (Leading Economic Indicator), I find the chart included in this press release to be interesting.  Here one can see the LEI at 104.9 for November.  As seen in the December 17 Press Release (link found below), the LEI is now slightly higher than the latest peak of July 2007.

The CEI (Coincident Economic Index) is at 100.1.  There is a sizable difference between the LEI and the CEI.

http://www.conference-board.org/pdf_free/economics/bci/USLEIpr_1209.pdf

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Characteristics Of The Housing Bubble

Friday, January 8th, 2010

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals.  It shows the equity and mortgage debt situation.  The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble.  Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation.  I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years.  Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful.  However, (economic) life is not that simple.

From an ”all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst.  It appears to me that it has somewhat deflated.  I base this view on a variety of fundamental and technical factors. 

Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense.   I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion.  The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity.  The second possibility is a collapse of the residential real estate market with accompanying economic repercussions.  As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble.  Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006.  Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

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Posted in Bubbles (Asset), Intervention, Real Estate, Sustainable Prosperity | 1 Comment »

More On The Fannie/Freddie Developments Of December 24

Thursday, January 7th, 2010

Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac.  This editorial provides some new perspectives on the matter:

http://online.wsj.com/article/SB10001424052748704152804574628350980043082.html

My original comments on these developments was on December 28.

I feel it is critically important to understand the extent of intervention as it pertains to the housing market.  Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts. 

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Ben Bernanke’s January 3rd Speech

Wednesday, January 6th, 2010

I would like to make a couple of comments regarding the speech Ben Bernanke gave on January 3.  It was titled “Monetary Policy and The Housing Bubble.” (pdf)

I could make a significant amount of comments regarding this speech, as I partly or fully disagree with many of the points presented.

I will, however, briefly comment on a couple aspects of the speech.  First, from page 21:

“Although the house price bubble appears obvious in retrospect–all bubbles appear obvious in retrospect–in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets.”

I agree with the general premise that bubbles aren’t always obvious.  As I said in my December 2 post, “Some bubbles are harder to spot than others.”  As far as the housing bubble was concerned, in my opinion it was a relatively easy bubble to identify as it occurred, based upon a variety of characteristics.

Second, from page 22:

“That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.”

I think it can be strongly inferred from this excerpt, as well as other statements that he has recently made, that he doesn’t believe there are asset bubbles currently in existence.  My analysis indicates otherwise, as I discussed in my December 2 & December 16 posts.

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Ponzi Schemes

Tuesday, January 5th, 2010

Occasionally I have written about investment frauds.  My last post on this topic was on November 27 and is found here:

http://www.economicgreenfield.com/2009/11/27/investment-frauds/

Here is a story from December 28 titled “Ponzi collapses nearly quadrupled in ’09″:

http://finance.yahoo.com/news/AP-Ponzi-collapses-nearly-apf-898755198.html?x=0&sec=topStories&pos=4&asset=&ccode

While I find this article’s statistics to be of interest, I do not necessarily agree with some of its commentary.

Of course, there are many types and permutations of investment frauds, of which Ponzi schemes are just one type.

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Consumer Confidence Disparities

Monday, January 4th, 2010

Here is a link to the latest (December 29) press release of The Conference Board’s Consumer Confidence readings:

http://www.conference-board.org/economics/ConsumerConfidence.cfm

I found the large difference between the Expectations Index and Present Situation Index to be notable.  The Expectations Index, at 75.6, was the highest in two years.  However, the Present Situation Index fell to 18.8 and remains at a 26-year low.

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