November 2006


From economic prospective we live in a very interesting moment. It happens every 2-3 years when everyone wonders what will happen next. There are basically two choices – goldilocks (soft landing) or recession. Each of those scenarios may come in different flavors.

  • Goldilocks
  1. Status quo. We slightly decrease imports and increase exports due a slight decline of dollar. Dollar continues to be petrodollar. China and Japan continue to buy dollars to finance our account deficits. GDP grows slowly
  2. Weak dollar. Dramatic decline of dollar helps keeping the nominal asset prices sound. Real estate prices and stock market are more or less at the current level. Increase of availability of domestic and foreign cheap labor keeps inflation reasonable. China and Japan are forced to drop export prices and accept a much weaker dollar
  3. Strong dollar. The major military cuccess in Iraq and Iran increased the dollar acceptance as the only currency that can buy oil. Petrodollar prevails. Current account deficit remains big but the huge profits of multinational corporations abroad offset any domestic problems. Citibank opens new branches all around the world
  • Recession
  1. Slight decline of a dollar. Bernanke keeps the rates high. Current account deficit remains high, treasury bonds are attractive to foreigners. Inflation is low, but the money supply is high. Real estate drops, consumers are spending less on foreign goods but invest more in pension accounts. Stock market declines at least 30% over next two years. It will be only slightly painful in 2007, but suddenly becomes very bad in 2008. In 2008 real estate suddenly becomes a curse and everybody envy renters. Suddenly the economists start talking about deflation
  2. Huge decline of a dollar. Dramatic reduction of import, some increase of export. Big pain of Chinese exporters, social unrest and blood in China. GM and Ford prevail over Honda and Nissan. Decline of stock market and real estate are big, but not so big as in the previous scenario. There is no deflation talks

Those are, in short, the scenarios of our economy. Let keep watching.

Thank you Mr. Greenspan for all this mess!

You all know this popular graph, posted and re-posted in many blogs:

It shows a 79% correlation between 12-month delayed NAHB housing index and S&P 500. And you all know that this graph is cheating, as previous years are removed. The whole picture is not so convincing:

It shows that we may not be so sure about the direction of S&P 500, after all.

But you know what – I’ll give you a better graph to look
at the correlation between the same homebuilder index and the real consumer spending:

It clearly shows that we have to wait just about 9 to 12 months from the collapse of NAHB index to the collapse of consumer spending. The index crash started in April of this year, 9 month lag should give us December-January to see the consumer to zip his pants really tight.

And this time it’s for real, no gimmicks, no cheating, just a crash.

Thank you Elmer (Greenspan) for all this!

So Greenspan is saying that the worst is behind us. I would say the worst is still ahead. Why?

I think we fundamentally differ in the definition of the worst. If the definition of worst is the speed of nominal price declines (that will be about -10% for this year) then it’s probably over. We may have couple of years of -5% y/y declines, but the days of -10% are over.

But if we define the worst in the sense of spilling off the housing troubles into economy then the worst is in front of us. Let’s check.

1. The consumer perception of price declines is not there yet. Amazingly, as reported by Calculated Risk, 66% of people still think that the value of their home increased in the last year. Those people are in total denial, as I doubt there are any spots on U.S. maps where prices rose this year. Just check the housing tracker.

2. We don’t see any major contraction in construction and construction employment. It’s coming

3. We don’t see consumer spending declines. It’s coming soon. Just watch the price war between Wallmart and Target.

4. We don’t see record delequency and foreclosure rates yet. Look at England or Australia, they have it already. For U.S., it’s coming next year

Thank you Mr. Greenspan for this mess!

Now, after cleaning out our champagne glasses, I want to say to my fellow bloggers – we did it!

Bush came to his office 6 years ago when blogosphere was virtually non-existing. We, the people, lost badly then and our voices were muted. Two years ago, when blogosphere was still in its infancy – and we lost again. Now, when we are finally strong and we can fight – we did it!

Millions of people lined out this past tuesday to kick G.W. Bush into his stupid fat ass. I saw him yesterday on TV and his ass was swelling and it was red like a tomato. Not even a baboon has it so bad.

Me, and a million of my fellow bloggers, we give and accept congratulations for the great job we did for this country and its people.

Congratulations!

CNN called Rumsfeld “an obnoxious jerk” but later apologized.

Let me also call  Rumsfeld an obnoxious jerk and I will not apologize 🙂

US invasion in Iraq, by Christophe Vorlet

4 months ago I’ve published the list of areas that were hit but housing decline the most. Frankly, looking back to June, it was not too bad back then.

Let me revisit the housingtracker and give you the list of the trouble zones that declined by more than 3% since July:

  1. Baltimore -4%
  2. Boston -3.4%
  3. Chicago -3.2%
  4. Cleveland -3.5%
  5. Detroit -3.4%
  6. Long Island (many small cities) -3.7%
  7. Miami -3.3%
  8. Orlando -4.8%
  9. Salt Lake City -5.4%
  10. San Jose -4.1%

This list leaves behind some trouble zones that declined back in spring and not so much lately. For example, Washington, D.C. had declined by 6.3% from April.

Thanks Mr. Greenspan for all our joys!