Asset Price Driven Economic Recovery Underway

What Will Drive Our Recovery?

Wealth destruction has created a major headwind for recovery as it has removed significant private money from the marketplace. But this is not the only headwind:

• Low employment / high unemployment – If you do not have a job, you have little money to spend of non-essential items.
• Huge private debt – Houses mortgages under water. Credit cards maxed. It is hard to qualify for a loan. This limits the ability of an economy to expand through borrowing.
• Government debt growing – the cost of the interest expense of this debt removes money from the economy. As the economy re-expands, normally the cost of borrowing increases.
• Demographic shift – the boomers are getting ready to retire. Some have already taken early retirement. Retired people do not invest or take risks like people with real jobs. And the majority of America’s wealth is with the boomers.
• More money being saved by consumer – Consumers spending on goods and services drives the economy. Less spending means less goods and services will be required.
• Growing banking losses including residential and commercial real estate – this is draining additional wealth.

All of us who analyze economic data spend a lot of hours looking for economic headwinds / weaknesses – as it is these weaknesses which counter the natural tendency of the economy to grow.

Another way to say this is that our economy will naturally grow but it is constrained by weaknesses or headwinds.

As economic data is a rear view mirror into the worst recession most of us have ever seen, it is not difficult to understand we cannot see any data that is economically positive. The positive trends are not yet appearing in the rear view mirror – but the hidden forces which drive those trends are growing none-the-less.

So stepping back from the data, what would counter these headwinds and drive the economy upward?

• Demand from Asia – not likely. Asia has never been a large market for America. With their resilience in this recession, it is more likely trade among the Asian countries will improve. This will drive investment dollars into Asia further accelerating Asian internal trade.
• A natural disaster or a war – I hope to hell neither of these events occurs.
• Corporate profits? – There still is a lot of pain to suffer but the worst is over. But corporate profits are not a big enough part of the economy to be a significant driver.
• Consumer spending – Create an environment where consumers believe they will have more tomorrow if they spend today. Consumers are not rewarded for saving if interest rates are low and asset appreciation (like inflation) takes root.
• Asset price appreciation? – Based on the backward looking data it does not seem possible. but ……..?

The most important asset to consumers are their homes.

The Case-Shiller June 2009 index showed that the sales price of the average home increased almost $2,000 MoM. This compares with the $7,100 MoM increase the National Association of Realtors (NAR) June 2009 data released last week.

Regardless of the discrepancy between the Conference Board and NAR data, jumps of this magnitude are difficult to ignore. I could conjure a variety of reasons why the data may be somewhat bogus, but there is no denying that the home prices increased no matter how you cut it.

I believe this price increase is transitory, and it is just a high buying season correction to a bear housing market. John Mauldin's Thoughts from the Frontline adds to my view.

And before we get too celebratory, my friend John Burns of John Burns Real Estate Consulting suggests we may be seeing a false bottom. What we are seeing is the result of a government program that offers first-time home buyers $8,000 if they buy a home by November 30; and that program is working, especially at the lower end of home prices (as you would expect, and as it should.) 31% of home sales in July were involved with this program. But like Cash for Clunkers in automobiles, this is pushing demand for homes from next year into this year.

John Mauldin graphed the effect of the first time home buyer’s credit which was responsible for 31% of the home sales in June 2009.

But let us assume what I believe about home prices is bullshit. Let us assume there is a real home price rally underway but we do not see any evidence yet except the obvious fact that home prices are increasing in value. How many do not believe the government and the Fed will do whatever it takes to put a floor under the housing market?

We may be witnessing the beginning of a string of economic policies to make sure home prices stop falling and start rising.

Why should we assume this?

Because restoration of wealth, even if it is illusionary, is the only mechanism I can identify which will reignite the economy.

If you take this leap of faith and ignore all data to the contrary, many things start to make sense. Like the bullishness of the equities market in the face of terrible consumer data (consumers are the traditional drivers of the economy).

The government and the Fed believe a strong equities market is paramount for economic health. How hard is it to keep the equities market rising? Hell, as long as you can create money out of the air, and you can call an insurer a bank – being able to keep a floor under equity prices is also possible.

There are two factors which work against this asset driven recovery scenario – consumer confidence and deflation.

Normally an asset lead recovery needs to be driven by consumer confidence. Two consumer confidence surveys were released this week. Both surveys (here and here) over the long haul are loosely correlated. Consumer confidence is up this month and remains higher than the recession lows. But overall consumer confidence remains terrible.

Bank of Tokyo-Mitsubishi UFJ offered an explanation of the lagging consumer confidence in their analysis of The Conference Board’s current index reading:

Confidence is up nearly 30 points since hitting a cyclical low in February. Typically, jumps of this magnitude are reserved for a war’s end, but consumers probably feel like they’ve been at war since the economy skidded to a halt in September 2008. Still, the jump hasn’t been completely consistent since June and July confidence pulled back before rising in August. Like the overall U.S. recovery, many economic indicators will improve in fits and starts along the way, such as we are witnessing in the Conference Board’s confidence data. As yet, even with the improvement in confidence over the past few months it still remains at a level that is well below even “normal” recessionary levels, a likely explanation as to why confidence has improved but consumer spending has not.

So the consumers are not buying into the good times argument. This is an unusual event in the waning days of a recession. I suspect the biggest reason consumers are not more upbeat (other than jobs) is their personal wealth.

Consumer’s wealth is down because their asset’s value has crumbled. Our economic masters need to make wealth reappear to regain consumer confidence in order to reignite the economy.

The master puppeteer of the economy is the Federal Reserve. At this point congratulations are in order for Fed Chairman Ben Bernanke who was nominated this week for a second term of Fed Chairman by President Obama. Part of his press release in accepting this nomination:

The Federal Reserve, like other economic policymakers, has been challenged by the unprecedented events of the past few years. We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable economic and financial environment in which opportunity can again flourish, and in which Americans' hard work and creativity can receive their proper rewards.

Home values are rising. This restores wealth.

The stock market is advancing. This restores wealth.

Are these asset value increases engineered for the good of our country? Should you complain that this new wealth may not be organic?

The Federal Reserve has two major mandates – keep inflation in check and create jobs.

The Fed has failed since 2000 in creating jobs so I assume this is off of the table. It seems like the government and the Fed have given up on creating an environment for jobs growth. I have written about this many times, and I probably will write on this topic many more times.

The Fed has emphasized to the point of nausea that they are going to keep a low prime lending rate policy for a really long time. Their policies and their words are committed to make inflation occur. Keynesians fear deflation, and will take whatever steps are necessary to make inflation happen.

So when inflation starts to raise its head, the Fed may not be interested in killing it off too quickly. Inflation is a friend of the illusion of rising asset values. Wealth must be restored.

The Fed will argue inflation is the price we must pay for recovery. In doing so, the Fed will abandon its mandate to keep inflation under control.

Of course this asset value recovery runs the risk of creating a new bubble – but this will be tomorrow's worry. The current government and the Fed’s policy is to push problems out into the future.

Until then - you heard Bernanke – he will be as bold as he needs to be to make things happen. I will take him at his word.

Manufacturing and Business

The advance report for durable goods for July 2009 is terrible. I know this runs contrary to the headlines which screamed new orders were up 4.9%. The headlines are based on a portion of the seasonally adjusted data.

This is advance information based on polling. Also, this report is for July and we are at the end of August. There are indications the data will improve in August.

Seasonally adjusted data at the end of a recession is probably sending you the wrong message as the normal buying patterns have been disrupted. And non-seasonally adjusted data is too volatile to analyze. But if you stand back and look at the data the real situation manufacturers are faced with is obvious.

Manufacturing in the Midwest rose 2.6% in July 2009. Before you break out the Champagne, it was due to the automakers coming back to work – all the other sectors are still declining. And the auto sector is only producing 50% of their 2002 output. There really is no good news.

Preliminary 2Q 2009 GDP (called second estimate) remain unchanged at negative one percent (-1%) from the advance data released last month. I will provide a more thorough review of this data in the next few days.

In the same report, Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $67.6 billion in the second quarter, compared with an increase of $59.1 billion in the first quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $26.9 billion in the second quarter, in contrast to an increase of $16.2 billion in the first.

According to the Chicago Fed, the national economy remained in recession territory in July 2009. Of the four broad categories in the index (1- production and income; 2 - employment, unemployment, and hours; 3 - personal consumption and housing; and 4 - sales, orders, and inventories), three were less bad and one improved.

Since the creation of the index in 1969, recovery of the CFNAI-MA3 index to -0.7 has correlated to the recessions end. The index currently stands at -0.69.

.

The New York Fed’s coincident economic indicators July 2009 show a slight upturn in economic activity in New YorkState and leveling in activity in New York City and New Jersey. The NY Fed provides little detail to probe their data.

The 4 week moving average of advance initial unemployment claims decreased slightly this week to 566,250. This is the first decline in the last three weeks, although the overall trend line remains down.

Additional Economic Data This Week

New home sales increased by 9.6% (seasonally adjusted) in July 2009. What is not in the headline is that sales are down over 13% YoY. Not only are sales down YoY, but they are less than ½ of the 2006 new home sales. The more new home sales increase, the more pressure it puts on existing home sales. The point is that increasing new home sales is good news for GDP as new home construction is included, but may be bad for consumer wealth which is the driver for consumer spending which is the main GDP driver.

This is the fourth straight month of increases. The median sales price of new houses sold in July 2009 was $210,100; the average sales price was $269,200. The seasonally adjusted estimate of new houses for sale at the end of July was 271,000. This represents a supply of 7.5 months at the current sales rate. As I said, this data is both good and bad.

The Clusterstock’s Chart of the Day brings a little perspective to the increase in new home sales.

The rate of new mortgage applications again improved slightly (slightly is less than 0.2%) this past week but remains in the range it has been bouncing around within since April 2009. The four week moving average ofmortgage loan application volume (which includes refinancing) increased 7.5% WoW, and increased almost 35% compared with the same week one year earlier. The average interest rate for 30-year fixed-rate mortgage increased 9 basis points to 5.24%.

Filing for Bankruptcy: Reader’s Digest Association (RDA) Taylor, Bean & Whitaker Mortgage (privately held) Colonial BancGroup (CBCG) Fountain Powerboat Industries (FPWB.PK)

Bank failures this week:

Economic Forecasts Published This Past Week

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index now is at a 38 year high. Lakshman Achuthan, Managing

Director at ECRI added:

With WLI growth continuing to surge through late summer, a double dip back into recession in the fourth quarter is simply out of the question.

Achuthan has recently projected that the recovery is moving at a stronger pace than any the United States has seen since the early 1980s.

Hat tip to Steve at MEMETICS & MARKETING for editing support.

Disclosures: long MMFs, IOO, SLV, EWZ, EWY, EWA, EWC, PIN, Physical Gold.

Comments

[Dave Wrixon:]

All tends to suggest that there a lot more dollars in circulation than we have been led to believe. I know the Fed can create money at will, but there are inherent risks with that regarding the stability of the dollar and interest rates. But what if the Fed actually created money without telling anyone. How we know that those extra dollars were out there, except perhaps through unexpected bubbles in asset prices?

Aug 30 08:15 AM

[H. T. Love:]

"This limits the ability of an economy to expand through borrowing."

Since we are aware of the diminishing returns of borrowing as debt increases, this may be a long-term benefit, regardless of the short-term angst.

Debt got us into this crap, it sure as hell ought to be avoided, at ths time, as a cure for what ails us.

"The government and the Fed believe a strong equities market is paramount for economic health."

ROTFLMAO. "Strong"? Have you noted the volume decline since the start of the year? The stick saves? The record profits of GS over the quarter where they only failed to make profits on three trading days? HFT? "Flash Orders"? The market following oil up and down? The dollar?

Oh well, it doesn't matter - the WLI says we are recovering - it must be so. Yep, corporate profits will rise and that's what America's all about now, isn't it? Damn the populace - they have use to corporations only as wages deflate and corporations can transfer some operations back from overseas to save on the shipping costs and increase profits.

And the nice profits reported last quarter? Most were paired with reduced reported top-lines.

I'm sure glad the economy is recovering so that coporate profits improve, with no benefit to the populace. "Jobless Recovery" is the new norm here. Properly it should be termed "Jobloss Recovery".

HardToLove

Aug 30 09:13 AM

[H. T. Love:]

It doesn't matter, only 4% more until the dollar bottoms, in 1913 dollars. Then it is 0 value. Thans to the Fed.

HardToLove


On Aug 30 08:15 AM Dave Wrixon wrote:

> All tends to suggest that there a lot more dollars in circulation
> than we have been led to believe. I know the Fed can create money
> at will, but there are inherent risks with that regarding the stability
> of the dollar and interest rates. But what if the Fed actually created
> money without telling anyone. How we know that those extra dollars
> were out there, except perhaps through unexpected bubbles in asset
> prices?

Aug 30 09:16 AM

[fran:]

our governmental priorities are A$$ backwards to growth. we spend our resource[time and energy] to "INSURE" ourselves[Obama care, etc] instead of "ASSURE" ourselves. we should have a priority of present and future employment, developing industial bases and an educated, skilled population to support the same industrial base. financial health must exist to assure our ability to devote $$$ and priority to other life necessities.

this won't happen with leadership of lifelong political classes who have not had a job outside politics in years, if ever.

look at their records, America. fire the incumbants as inept. cut the spending marathon. treat YOUR government as a business. treat it[gov't] as you get treated in your work/economic lives.

Aug 30 09:17 AM

[H. T. Love:]

BTW, great article and work! I'm so pi**ed right now about the general state of things I forgot to thank you.

Thank you for the great work you do.

HardToLove

Aug 30 09:28 AM

[Old Trader:]

Anecdotal data on new house pricing in metro Chicago (from signage on the back of a CTA bus from a high(er) end developer of a West Loop high rise condo building:

1 bedroom: Was $346k/ now $246K
1 bedroom + den: Was $400k/ now $293k
2 bedroom Was $450k/ now $341k

Aug 30 10:27 AM

[basehitz:]

“How many do not believe the government and the Fed will do whatever it takes to put a floor under the housing market?”

And every other market it seems. The indebted are helped by inflation. So they will try to prop up everything, with short-term fixes:
1) massive subsidies to political allies, some of questionable long term benefit. Example, GS saved/LEH flushed (Hank Paulson former GS CEO). Example, GM given $50B but CIT denied $3B, though CIT provides critical financing to 1 million small businesses. (1m businesses = a lotta jobs. Was this really just about jobs?)
2) handouts to consumers for short term boost to housing, autos, appliances, whatever. All short term, at the expense of future spending and much needed consumer saving.
3) A confidence building campaign designed to inflate stocks, which Da Boyz then cite as “proof” that good times are ahead. (Ignore all those “stick saves”, sandbagged estimates, distorted news releases, etc. The market “knows”.) Instead, listen to Tout TV and forget that they led you off a cliff last year.

Long term solutions are lacking. Consumers are still deep in debt with a weak job market, a particularly nasty combination. And due to decades of outsourcing, the long term prospects are weak also. Yet consumers are being seduced to stop saving and resume over-spending. Bad idea.

Add to that CRE risks, on-going home foreclosures, foreign resource dependency, unfunded liabilities, weakening demographics, etc. Handouts and hype are producing a sugar high. Long term prosperity requires something better.

This is not fear mongering, as is being increasingly suggested by some. (A rising market does that.) We’ve got some really serious problems, that wishful thinking will not fix. Here’s just one of them.

2.bp.blogspot.com/_vIR...
(ht TraderMark)

Aug 30 10:55 AM

[Outofchips:]

As always, outstanding presentation. I want to invest in you.

Aug 30 11:21 AM

[John Lounsbury:]

Steve - - -

Great job on housing data summary. There is a real risk that the John Mauldin view of a false bottom can occur. I expect the first time home buyer incentive will be renewed for 2010, but the pool of qualified first time buyers may start to decline at some point. IF employment improves significantly and IF the stock market continues to advance and IF homebuilders don't over build for a weak demand market, the false bottom becomes much more likely to actually be a real bottom. If that is the case (a real bottom in 2009), more delinquency notices may actually be cured. According to something I read at Mish, the normal "cure" rate for delinquenct notices for mortgages is of the order of 50%. Recently it has been 6%; i.e., 94% of delinquency notices have proceeded to foreclosure.

You suggest that the government and the Fed will try to put a floor under the housing market. I agree. But do not forget the key word is "try". Will it be a try like the flood dikes in New Orleans? Or the Dutch Boy at the dike? Or can it possibly be effective? We don't know yet, but analysis I am still working on suggests we should not assume a successful try yet. I keep hoping that, as I finish my work, a better path forward will emerge for housing. I want to be an optimist (it is my nature), but smashed fingers still grasping for hope begin to require more evidence before attempting to grasp again.

I could talk about other things you addressed. But I will leave to others such topics as (1) the continuing risk of rolling bubbles, (2) the remergence of the same old financial operations (intermediation for finance instead of intermediation for commerce, which is what it should be) and (3) utterly ebullient WLI from ECRI.

Good job again this week.

Aug 30 11:21 AM

[TEC:]

more anecdotal evidence, but on job loss - i was at the gun range and business is way down. the regulars who shoot during the week to hone their skills are not coming in now because they've lost their jobs...(in case you didn't know ammo prices have skyrocked as well so maybe this is part of the reason...anyone have an idea why ammo prices are so high? since ammo is somewhat commodity related maybe someone here knows...did i just answer my own question?)

also, during conversation with several owners/vendors in the construction business - business is off 30-40% (for some this is on the low side)...

...and this is in San Jose, Ca.

It seems perception rules the day...thanks and great article...

Aug 30 11:49 AM

[Old Trader:]

TEC,

I seem to recall reading an article somewhere, that the military's needs have been soaking up all available production, including purchases of brass. I can't recall all of the details, but do seem to recall .223 ammo was/is affected, for some reason.


On Aug 30 11:49 AM TEC wrote:

> more anecdotal evidence, but on job loss - i was at the gun range
> and business is way down. the regulars who shoot during the week
> to hone their skills are not coming in now because they've lost their
> jobs...(in case you didn't know ammo prices have skyrocked as well
> so maybe this is part of the reason...anyone have an idea why ammo
> prices are so high? since ammo is somewhat commodity related maybe
> someone here knows...did i just answer my own question?)
>
> also, during conversation with several owners/vendors in the construction
> business - business is off 30-40% (for some this is on the low side)...
>
>
> ...and this is in San Jose, Ca.
>
> It seems perception rules the day...thanks and great article...

Aug 30 12:22 PM

[Gregman2:]

"But let us assume what I believe about home prices is bullshit. Let us assume there is a real home price rally underway but we do not see any evidence yet except the obvious fact that home prices are increasing in value. How many do not believe the government and the Fed will do whatever it takes to put a floor under the housing market?"
In Silicon Valley, anyway, there are A LOT of mid-market buyers using that $8000 credit...mostly Indian and Asian buyers. It's a veritable parade out here.

Aug 30 01:06 PM

[H. T. Love:]

If I recall, that's the new standard size round for more effective combination of range, accuracy and knock-down power. Being widely adopted.

On Aug 30 12:22 PM Old Trader wrote:

><snip>
> ... but do seem to recall
> .223 ammo was/is affected, for some reason.

Aug 30 04:13 PM

[computer co...:]

If you look at Case Shiller data for NYC condos you will see 1.5% monthly decline which translates into 18% fall annually.

Aug 30 05:08 PM

[aarc:]

Look outside the window.

China has been in the process of developing their own consumer-based economy since last year.

Japan is going to develop their own consumer-based economy.

They are not going to depend mostly on the US and European consumers for their national growth. They are going to developed their own growth internally.

Soon, other countries, specially developing countries, will follow the examples of China and Japan.

For decades the United States had been the source of growth for practically the whole world. American consumerism was the major force that drives internal and external growth.

Now that the US consumers have learned that over-indulgence with high flying lifestyles for several decades has a steep price, they are not going back into that bad habit in a hurry.

But, the United States was able to develop the luxury products that enables it to enjoy the best there is that a good life can give.

It won't take long for China, Japan, India, Russia, Brazil, and other developing countries to develop their own consumer-based economies. They need not try to re-invent the wheel. They have a role model = the United States of America.

Just as they did copying American industrial and technological inventions; they can also copy american type of consumerism with a twist of their own; only that naturally they will have to provide safeguards in order to avoid over-indulgence that can lead to ruin.

The point is; the United States already got the luxury goods to sell to those countries. And they have BILLIONS of population eager to have a taste of the good old american way of life. They watch american movies and tv shows most of their growing up years. They sure know how the americans live their lives. And they want it too only that they were so poor back then in the 60s, 70s, and 80s. But now after a few decades of industrialization, they are learning how to get rich. That is not the end of it. They want to be as rich as their american model.

That is a huge market for american made "branded" products. Products that fetch high profit margins unlike the no-brand household products they sell to America in large quantities.

2,500 million potential customers for american made luxury items. Well, definitely less than half of that. Most of them are still in the low income groups.

It will take time for them to get richer. So much the better, America will have willing customers for decades to come as they get richer and richer.

Everybody gets rich. Only that the majority of those newly created wealth will go to the one who will be selling the most profitable products to the widest number of people in the world.

A global-based consumer led growth for the United States economy for decades to come.

Forget the all mighty american consumerism. It's in the past. Start looking outward instead of inward.

Aug 30 08:49 PM

[Steven Hansen:]

aarc
your view of the change in dynamics of consumerism is very plausible.

yesterday, i was delivering a vessel to singapore and noticed over 10 high rise complexes under construction in the financial inner city. one project had over 70 cranes (i counted). these were not small 20 ton hydraulic types, but crawler (lattice boom 100t and higher) and tower cranes.

i see this all over asia. asia is just plain booming.

but except for american produce, i see little american goods except at hardware stores (the better tools are german or american). the exception is buick cars in china.

so if america wants to export luxury goods (which are now european or asian made today), we better adopt a more aggressive export policy.

Aug 30 09:38 PM

[Anthony B:]

aarc - "Everybody gets rich. Only that the majority of those newly created wealth will go to the one who will be selling the most profitable products to the widest number of people in the world."
- I don't mean to be an Apple fanboy, but Apple definitely is the first company to pop into my mind when I read that. Especially with the just announced China Unicom deal.
Any other companies come to mind? and don't say CAT

I really like your take on the big picture aarc. Hopefully, all the doomsday predictions of increased violence brought on by more limited resources (oil & water) is avoided by a more educated world populace with a lower birth rate.

Aug 31 12:59 AM

[Brendanav:]

"(in case you didn't know ammo prices have skyrocked as well
> so maybe this is part of the reason...anyone have an idea why ammo
> prices are so high? since ammo is somewhat commodity related maybe
> someone here knows...did i just answer my own question?)"



Ammo has definitely gotten more expensive and harder to find. There is substantial stockpiling going on and as always, when scarcity becomes evident then the even larger population of late adopters starts piling in. Shelved ammo is being bought up in discount stores like Wal Mart, then resold in gun stores in less traveled places, because they are having trouble restocking. There are guys who bought vast numbers of cases early on and resell them informally, I hear. Shooters had also gotten used to inexpensive surplus steel-case ammo out of the old USSR in 7.62 X 54 (basically 30-06) and the ubuquitous 7.62 X 39 for the AK series (ballistically almost indistinguishable from the good-ole 30-30). Really excellent 7.62 X 39 came out of the Balkans and Zimbabwe, where that thug government sold off huge amounts of Chinese made brass-cassed ammo so dirt cheap it still makes me cry (Cheetah brand). Those days are over. Ammunition prices have also risen since a substantial component of the price is the brass used in the cartridges, and there is some contribution by the copper jackets/lead in the bullets. A fistful of 0.308 empties (another hard to find cartridge) is pretty hefty and tells of expensive elements. Originally there was also some shortage caused by the Iran/Afganistan adventures, and substantial police use of .223/.308/9mm and 10mm/.40 and .45, as they beefed up internal arms familiarity e.g. homeland security. This latest tightening was all set off prior to and continuing with the Obama admin, since there was and still is a very legitimate concern that these known gun grabbers; including his Atty gen Holder and virtually all his people are on paper as such. These events started a stampede to obtain "assault-type" weapons (a real misnomer) with the classic AR-15/AK-47/FALN looks. These weapons tend to eat a lot of ammo, so it is not unusual for people to use a couple hundred rounds in a day's plinking, or even on the range, In any event, while those rifles are still 'way back-ordered except at a few well connected vendors, that shortage will dissappear with time, as will the ammo shortage.. In fact I saw a big pallet of .223 in a gunshop in Wisconsin just a couple weeks ago, and round the clock shifts on many production lines, stabilizing prices and stockpiler fatigue will eventually cure the problem. Don't look for much lower prices, however. Those days are over.

Aug 31 09:39 AM

[Russ Wetherill:]

The Fed's attempts to prop up the housing market remind me of when Bullwinkle tried to be a magician:

Hey Rocky, watch me pull a rabbit out of my hat!

Invariably, the moose pulled something out of the hat, but never a rabbit - and it was usually something he quickly pushed back in again.

I believe that Bernanke is keeping the prime lending rate low for several reasons: 1) to slow the resets and recasts on ARM loans, thereby mitigating, although not preventing, the next wave of foreclosures; 2) preferring inflation to deflation, debts are harder to pay when the dollars are worth less than when the debts were incurred but much easier to pay with inflated dollars; and, 3) allow the banks to recapitalize by lending money at extremely low rates that can then be re-lent at higher rates.

The problem with pulling the inflation rabbit out of your hat is that there is no guarantee that it will be a nice, fluffy, docile inflation rabbit; it may end up being a not-so-nice, scruffy, ferocious inflation lion, instead. Then the challenge is to force the lion back into the hat before he eats you.

Aug 31 05:58 PM

[H. T. Love:]

On Aug 31 05:58 PM Russ Wetherill wrote:

> The Fed's attempts to prop up the housing market remind me of when
> Bullwinkle tried to be a magician:
>
> Hey Rocky, watch me pull a rabbit out of my hat!
>
> Invariably, the moose pulled something out of the hat, but never
> a rabbit - and it was usually something he quickly pushed back in
> again.

You left out the best, and most appropriate part!

"I gotta get me a new hat!"

Bullwinkle to Rocket J. Squirrel.

Just like the Fed, Bullwinkle didn't realize that the problem was his, not the hat's.

> <snip>

>
> The problem with pulling the inflation rabbit out of your hat is
> that there is no guarantee that it will be a nice, fluffy, docile
> inflation rabbit; it may end up being a not-so-nice, scruffy, ferocious
> inflation lion, instead. Then the challenge is to force the lion
> back into the hat before he eats you.

And in recent memory, only Volcker successfully did that.

HardToLove

Sep 01 06:24 AM