Category Archives: Email

Re: UK

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(email exchange)

>   On 12/3/08, Kevin wrote:
>   
>   Hi Warren,
>  &#160
>   The UK deficit and debt to GDP is increasing dramatically as the government
>   seeks to stabilize the economy.
>   

Yes, good move on their part. That will restore demand/output/employment.

>   
>   With the UK being a net importer of goods.
>   

Yes.

>   
>   And sterling not benefitting from being a “reserve” or “commodity based
>   price” currency.
>   

Whatever that means with floating FX.

>   
>   What impact does the increased reliance on foreign based capital as a funding
>   source for the government.
>   

The government is not reliant on foreign based capital with it’s currency of issue. It spends first by crediting accounts at its own central bank, the offers those accounts interest bearing alternatives like guilts, etc..

>   
>   have on the price of sterling and gilt yields in the medium term?
>   

The currency could go down relative to other currencies. It’s sure looked way over valued to me for quite a while. Even at one to one with the dollar prices would still be high there.

>   
>   Ask this question as it appears foreign investors are beginning to question
>   whether the UK, with its huge reliance on the financial services industry, very
>   low domestic savings ratio and a consumer that has incurred residential
>   property debt levels dramatically in excess of those in the US, should be
>   compared to Iceland and may suffer similar consequences if there was a
>   dramatic loss of confidence in the UKs economic prospects.
>   

Iceland’s problems are with external currency debt, and with a govt that doesn’t know how to best deal with private sector external currency issues.

>   
>   Many thanks
>   
>   Kevin
>   


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Re: California sales data

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Thanks- they were definitely way over priced to begin with. And who’d want to live out there anyway???

>   
>   See data in tables below, especially the first table with the sales and
>   price change data.
>   
>   If this was the only factor in the markets’ determination of a bottom we
>   would be there.
>   
>   What else can the market ask for but a doubling in volume with prices
>   down close to 40% in many working class areas?
>   
>   Granted, there is a risk of higher unemployment, which might create
>   lower incomes and again erode the ability to service the mortgage, but
>   it seems to me that we are closer than the market now thinks to real
>   estate stabilization, at least in California, which you would agree is not
>   insignificant. A major fiscal package could have a surprisingly strong
>   impact, given these underlying conditions. Nobody is really talking about
>   this, as far as I know.
>   

C.A.R. reports sales increased 117.1 percent in October

C.A.R. reports sales increased 117.1 percent; median home price fell 39.9 percent in October

LOS ANGELES (Nov. 25) – Home sales increased 117.1 percent in October in California compared with the same period a year ago, while the median price of an existing home fell 39.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Statewide sales increased significantly in October to 552,750 homes on an annualized basis, the highest sales level since late 2005,” said C.A.R. President James Liptak. “The record gain stemmed primarily from extremely large increases in regions with a high concentration of distressed sales.

Closed escrow sales of existing, single-family detached homes in California totaled 552,750 in October at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity increased 117.1 percent from the revised 254,650 sales pace recorded in October 2007. Sales in October 2008 increased 9.5 percent compared with the previous month.

The median price of an existing, single-family detached home in California during October 2008 was $ 311,060, a 39.9 percent decrease from the revised $517,240 median for October 2007, C.A.R. reported. The October 2008 median price fell 1.9 percent compared with September’s revised $316,960 median price.

“The year-to-year decline in the statewide median home price was smaller in October than the previous month for the first time in 11 months,” said C.A.R Vice President and Chief Economist Leslie Appleton-Young. “However, there is still no conclusive indication that prices have begun to stabilize.”

Highlights of C.A.R.’s resale housing figures for October 2008:

  • C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in October 2008 was 5.9 months, compared with 15.2 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
  • The median number of days it took to sell a single-family home was 45 days in October 2008, compared with 58.8 days (revised) for the same period a year ago.

In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 1.6 percent, or 6 out of 37 8 cities and communities, showed an increase in their respective median home prices from a year ago.

Note: Large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices for September may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible through C.A.R. Online at http://www.car.org/economics/historicalprices/2008medianprices/oct2008medianprices/.

  • Statewide, the 10 cities with the highest median home prices in California during October 2008 were: Newport Beach, $1,150,000; Danville $883,250; Mountain View, $860,000; Santa Barbara, $835,000; Los Gatos, $810,000; Cupertino, $804,500; Santa Monica, $744,500; San Mateo, $740,000; Redondo Beach, $727,500; and San Ramon, $710,500.
  • Statewide, the cities with the greatest median home price increases in October 2008 compared with the same period a year ago were: Mountain View, 18.6 percent; Alhambra 13.4 percent; Ridgecrest 6.2 percent; and Berkeley, 5.9 percent.

    • October 2008 Regional Sales And Price Activity
    Regional and Condo Sales Data Not Seasonally Adjusted

    Median Price Oct. 08 Percent Change in Price from Prior Month Sep. 08 Percent Change in Price from Prior Year Oct. 07 Percent Change in Sales from Prior Month Sep. 08 Percent Change in Sales from Prior Year Oct. 07
    Statewide
    Calif. (sf) $311,060 -1.9% -39.9% 9.5% 117.1%
    Calif. (condo) $267,700 -8.4% -36.7% 10.3% 63.3%
    C.A.R Region
    Central Valley NA NA NA NA NA
    High Desert $154,660 -3.2% -41.8% 9.0% 269.2%
    Los Angeles $366,520 -2.6% -32.2% 0.0% 118.9%
    Monterey Region $336,630 -3.2% -52.7% 7.6% 144.0%
    Monterey County $285,000 1.8% -54.0% 13.1% 275.8%
    Santa Cruz County $500,000 5.3% -31.7% -4.8% 25.5%
    Northern California $310,120 -3.5% -17.0% -4.3% 16.5%
    Northern Wine Country $369,890 0.2% -30.6% 15.6% 95.4%
    Orange County $490,360 -1.1% -28.6% 5.3% 108.1%
    Palm Springs/ Lower Desert $206,050 3.1% -36.3% 6.3% 115.0%
    Riverside/ San Bernardino $209,990 -3.6% -39.7% 13.5% 254.9%
    Sacramento $196,920 0.5% -36.3% 4.1% 173.1%
    San Diego $337,640 -9.6% -37.4% 25.0% 131.6%
    San Francisco Bay $520,920 -6.1% -35.8% 1.0% 49.1%
    San Luis Obispo $396,430 5.7% -27.7% 19.6% 57.3%
    Santa Barbara County $341,300 -4.0% -54.0% 2.7% 83.5%
    Santa Barbara South Coast $860,000 -9.0% -35.1% -2.7% 18.0%


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Re: Government support for GSE assets and debt

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Yes, the Fed is the agency that’s set up to buy financial assets, not the treasury as per the TARP.

They got that one wrong, this one right, in that respect.

Of course, no excuse not doing this a year ago- more evidence of a failure to grasp basic monetary operations.

>   
>   Just hitting the tapes!
>   *FED TO LEND UP TO $200 BLN TO INVESTORS IN ABS :FNM US, FRE US
>   *FED SETS UP TERM ASSET BACKED SECURITIES LOAN FACILITY :FNM US
>   *FED TO BUY MBS THROUGH ASSET MANAGERS, STARTING BY YEAR-END
>   *FED TO START BUYING GSE OBLIGATIONS NEXT WEEK :FNM US, FRE US
>   *FED TO BUY DIRECT GSE OBLIGATIONS THROUGH PRIMARY DEALERS
>   *FED PURCHASES OF GSE SECURITIES TO BE OVER `SEVERAL QUARTERS’
>   *FED SAYS SPREADS ON GSE DEBT HAVE `WIDENED APPRECIABLY’
>   *FED ACTION AIMED AT REDUCING COST OF CREDIT FOR BUYING HOMES
>   *FED TO BUY UP TO $500 BLN OF FANNIE, FREDDIE, GINNIE MAE MBS
>   *FED TO BUY UP TO $100 BLN OF `DIRECT OBLIGATIONS’ FROM GSES
>   *FED TO BUY UP TO $600 BLN OF GSE DEBT, MORTGAGE SECURITIES
>   


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Re: Obama on fiscal policy

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And how about this:

Obama: costly stimulus needed to jolt U.S. economy

By Jeff Mason and Ross Colvin

Obama said the country would see a substantial budget deficit next year, which he described as “bigger than we’ve seen in a very long time.”

“American taxpayers are understandably concerned, if we already have a big deficit, and now we’re added an additional stimulus, how are we going to pay for all that?” he said.

“The right answer is that we have to first focus on getting the economy back on track.”

Obama said he would discuss steps toward a “sustainable and responsible budget scenario” at a news conference on Tuesday at which he is expected to announce further members of his economic team.

“We’ll have to scour our federal budget, line by line, and make meaningful cuts and sacrifices, as well, something I’ll be discussing further tomorrow,” he said.

>   
>   On Mon, Nov 24, 2008 at 5:41 PM, Scott wrote:
>   
>   Looks like Obama wanted her precisely because of her work on the
>   history of the depression and WWII era, and her work at NBER
>   analyzing business cycles. So far, everyone on the team (except I
>   don’t know Geithner’s views on this, but assume he’s pretty
>   mainstream) views long run deficits as bad for interest rates, capital,
>   and growth. Not good, but they may never get the chance to worry
>   about the long run in that case!
>   


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Re: US May Lose Its ‘AAA’ Rating

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>   
>   On Wed, Nov 12, 2008 at 11:37 PM, Morris wrote:
>   
>   The Muni stuff is more interesting… See the data…if the USA loses AAA.,
>   what does that make states with Budget Gaps of over 10pct of GDP and
>   NO capability for a funding mechanism to print money????
>   

Dependent on the US government/banks for credit, like the rest of us- (we may now need both a payroll tax holiday and a trillion or so of revenue sharing for the states).

And restoring growth and employment is no big deal, actually, if government sustains demand at reasonable levels, which it always, readily, can do.

We sent men to the moon 40 years ago, cram mind boggling technology into cell phones, do robotic surgery, and don’t understand how a simple spreadsheet called the monetary system works.

Remarkable!

US May Lose Its ‘AAA’ Rating

The United States may be on course to lose its ‘AAA’ rating due to the large amount of debt it has accumulated, according to Martin Hennecke, senior manager of private clients at Tyche.

Yes, that may happen, as ratings agencies have no clue how it all actually works.

“The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system” and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

With government spending not constrained by revenue, any such event would be an unnecessary political response.

“In the United States there is already a funding crisis,

Not for government.

And a close look at actual monetary operations shows government best thought of as spending first and then borrowing or collecting taxes. Any constraints are necessarily self imposed (debt ceilings, no overdraft at Fed provisions, paygo policy).

and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off,” Hennecke told CNBC.

No, the Fed government sells bonds after they spend, not in order to spend.

In order to solve or stem the economic slowdown, Hennecke suggested the US would have to radically reduce spending across all sectors and recall all its troops from around the world.

No, to stem the slowdown the US has to increase its deficit- increase spending and/or cut taxes.

Fortunately, this is already underway via the ‘automatic stabilizers’ as tax revenue slows and transfer payments increase.

Unfortunately we still don’t have the good sense to do this proactively.

>   
>   On Thu, Nov 13, 2008 at 6:53 AM, Morris wrote:
>   
>   Your theories are quite interesting- why wouldn’t the G20 announce
>   this sort of massive WW stimulus package of say, 10 trillion dollars to
>   restart all local economies?
>   

They might.

Two points:

1. Deficits need to be ongoing to sustain the financial equity that supports credit structures. It’s not just a matter of ‘jump starting’ though that certainly doesn’t hurt.
We got into this mess by letting deficits get too low. We have yet to recover from the surplus years of the late 90’s that reduced private sector financial equity by maybe a trillion USD, back when that was a lot of money.

2. Any nation is better off by doing it unilaterally in sufficient quantity to restore output and employment. The last thing anyone needs is foreign consumers competing for scarce resources.


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Re: Unilateral Fiscal Policy is more Beneficial than a Coordinated Response

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Dear Philip,

Yes, there is a general shortage of aggregate demand.

However, if any one nation uses a fiscal adjustment to restore demand it will be that much better off if the rest of the world does not increase its aggregate demand.

Fiscal adjustments, much like imports, provide benefits and not costs.

Any unilateral fiscal response will restore both domestic output and employment as well as increase imports from nations who continue to suffer from a lack of aggregate demand.

The idea that there is a need for international coordination is continued evidence of a lack of understanding of the world’s monetary systems.

All the best,

Warren

>   
>   On Thu, Nov 13, 2008 at 4:27 AM, Prof. P. wrote:
>   
>   Dear Warren,
>   
>   Many thanks.
>   
>   What you suggest is very true. But not just in the US. Here in the UK
>   and practically everywhere else in the world this is very urgent and a bit
>   overdue. Do you not agree? Would anything along these lines come out
>   from the meeting of the G20 over the weekend, I wonder.
>   
>   Best wishes, Philip
>   


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Re: Fed comment on currency swaps

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Yes, thanks, seems he doesn’t fully grasp what the swaps are about?

Seems none of them do.

With oil going down the US will spend less on imports making USD harder to get overseas, keeping the USD relatively strong and exacerbating the foreign sector USD squeeze.

>   
>   On Wed, Nov 12, 2008 at 10:44 PM, J A wrote:
>   
>   In his speech, Mr. Kohn said some special lending facilities, such as a
>   program for the commercial-paper market, “are clearly emergency
>   operations only” and would be wound down. Some of the Fed’s
>   temporary lending programs such as currency swaps with other central
>   banks and auctions for credit at the Fed’s discount window might
>   become permanent, he said.
>   


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Re: Uncle Sam’s Credit Line Running Out?

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>   
>   On Wed, Nov 12, 2008 at 10:31 AM, John wrote:
>   
>   Here is support for recent reviews and portfolio positions.
>   

Yes, thanks, and ridiculous, of course. Comments below:

Uncle Sam’s Credit Line Running Out?

By Randall W. Forsyth

The yield curve and credit-default swaps tell the same story: The U.S. can’t borrow trillions without paying a price.

Not saying that at all!

What was once unthinkable has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers’ and the central bank’s credit in so many new and untested schemes that you can’t tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world’s most creditworthy borrower, the U.S. government itself? Unthinkable?

Yes, government spends first, then borrows.

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. “Near-term pressures on Treasury finances are much more intense than we had thought,” Goldman Sachs economists commented when the government announced its borrowing projections last week.

Define ‘intense’ please…

It may finally be catching up with Uncle Sam. That’s what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve reflects anticipated Fed funds rate targets plus ‘technicals’ which can include misguided risk perceptions.

But the Treasury has not needed to issue longer term maturities. It can do it all in 3 month bills or even shorter maturities.

Treasury securities function to ‘offset operating factors’ and provide interest bear accounts as alternatives to the interest rate now paid on excess reserves.

And any constraints on government spending are self imposed.


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Re: Obama’s challenge- OPEC, the Saudis, and the Russians

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Yes, that’s the issue when there is more excess capacity than any one producer can afford to ‘allow.’

The excess production capacity (until recently) has been under 2 million barrels per day. This has allowed the Saudis to be ‘price setter’/swing producer as all other producers could produce flat out,
and the Saudis could set price and let their output fill the remaining demand of about 9 million bpd.

In July, however, Mike Masters triggered a massive inventory sell off as passive commodity players and specs hit bids to reduce positions, and the demand for physical inventories also fell as it seems many physical inventories probably had been held at relatively high levels in anticipation of higher prices.

This meant the Saudis could not control price without major and obvious production cuts- maybe $5 million bpd- to speed the inventory adjustment and retain their position as swing producer/price setter.

I looked at (guessed) the latest announced OPEC production cuts as a sign the Saudis thought the inventory liquidation was largely past and that they were again able to set price and let production adjust to the residual demand. With other OPEC members cutting output some, the Saudis could set price and expect the residual demand that determines their output would be that much higher.

Yes, demand is down in many regions, but so far no figures released on world demand for crude has indicated an outright decline in demand. Yes, some supply indicators are up some, but others are down. The balance is not clearly tipping to a large enough cut in net demand to dislodge the Saudis as price setter.

Note that West Texas crude is over $3 higher than Brent- a wider spread than the shipping charges might indicate. This implies a shortage of WTI. But at the same time the WTI futures markets are in contango, indicating comfortable inventory levels. Also, the gasoline crack has gone negative vs WTI, indicating perhaps it is being prices off of Brent which means the marginal supply is currently imported gasoline as domestic refiners continue to produce well below capacity.

Russia is the large non-OPEC exporter, and the recent meetings with the Saudis and the below commentary indicate some form of cooperation is in process.

What the oil exporters should be hoping for is a world wide move to restore aggregate demand without an immediate policy to reduce fuel consumption. That will enable the oil exporters to increase their real terms of trade via price hikes.

The darker side is that instead of looking to optimize their real terms of trade, their primary focus may be on keeping the western economies ‘weak’ to keep them focused inward and allow the Russians freedom to operate as they please in their regions of choice, and hasten the exit of the ‘infidel’ from Iraq and the rest of the middle east. In this case, price hikes will be used to keep the western economies weak and off balance, as they confront inflation, weakness, and deteriorating real terms of trade and standards of living, with real wealth moving towards the oil (and other energy) exporters.

On the other hand it is possible the oil exporters want to keep prices low enough to discourage moves away from petroleum, especially in the auto industry.

Point is, currently and for at least the next several years, the Saudis/Russians control price, and we can only guess to what end.

>   
>   On Tue, Nov 11, 2008 at 7:16 AM, wrote:
>   
>   One bit of news, brought to our attention by our friend, Mr. Elio Ohep, the
>   Editor/Publisher of the always interesting petroleumworld.com, is that of the
>   anger on the part of Russian Prime Minister Putin regarding the current price
>   for crude, and Russia’s apparent inability to do anything about it. Clearly
>   Putin & Company are upset by crude’s weakness, for much of the current
>   military build-up taking place there, and much of the infrastructure growth
>   taking place is predicated upon high priced crude oil. Speaking over the
>   weekend, Mr. Putin said that Russia must do what it can to influence oil
>   prices. He said, in an interview on Russian national television, that We need
>   to work out a whole range of measures that will allow us to actively influence
>   the market…As one of the major exporters and producers of oil and
>   petroleum products, Russia cannot stand aside from formulation of global
>   prices for this natural resource. There is little that Russian can do however
>   other than cut production and hope that others… especially OPEC…follows
>   suit. The problem that Russia, and Venezuela, and Mexico, and Ecuador, and
>   Indonesia, and Saudi Arabia and seemingly all of the oil producing
>   nations….especially Iran…. face is that they need the cash flow from crude
>   oil to keep buying the support of their restive populations. They’ve no choice,
>   and low prices make their jobs all the harder, for in hoping to keep their cash
>   flows high they need to pump more, not less, crude. Putin and Ahmadinejad
>   find themselves as uncomfortable brethren in economic arms, hoping that the
>   other will cut production.
>   


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