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Related Post

From our sister blog Investorazzi.com earlier today:

“Marc Faber, Jeremy Grantham Warn Of Global Bubble”

“‘I am officially scared,’ GMO investment manager Jeremy Grantham told professionals from as far away as Abu Dhabi and Malaysia. ‘In 2000, we had a technology bubble. But this is massive, a massive credit crisis and a bubble in global housing, global equity and global land.’”

Second Stimulus Package Update

Seems like there’s been a lot of interest lately in a second stimulus package to get the U.S. economy back on its feet. On July 15, I talked about how House Speaker Nancy Pelosi met with several economists and announced afterwards that:

We will be proceeding with another stimulus package.

On July 22, Reuters reported:

The U.S. Congress is discussing a second economic stimulus bill that could include nearly $15 billion in infrastructure spending, a senior member of the House of Representatives told Reuters on Tuesday.

Rep. James Oberstar, a Minnesota Democrat who chairs the Transportation and Infrastructure Committee, said a stimulus package could include “accelerating” pay-outs of $9.5 billion from the federal trust fund dedicated to road construction and maintenance…

The money would go to funding more than 2,600 projects, he said. States would receive full federal funding and then have a few years to pay back any matching funds.

Richard Cowan, John Crawley, and Lisa Lambert noted:

Congressional aides have discussed infrastructure elements to the plan, but have not provided cost estimates or other details. The timing of any second stimulus bill remains up in the air.

The Senate Appropriations Committee on Tuesday postponed consideration of its version of a second stimulus plan until September, said Robert Byrd, the panel’s chairman and a West Virginia Democrat.

President George W. Bush has indicated he wants to see how effective the first stimulus package is before looking at another one.

The idea of a second stimulus package hasn’t been lost on U.S. presidential candidate Barack Obama. According to the Star Tribune of Minneapolis-St. Paul yesterday:

Back from a nine-day overseas trip, Sen. Barack Obama made a point of turning to domestic concerns, calling a meeting Monday to solicit advice on reviving the economy and lifting wages.

Obama’s 2 1/2-hour economic forum, which was closed to the media, included some of the top economic policymakers of recent Democratic and Republican administrations. Among them were Robert Rubin and Paul O’Neill, Treasury secretaries in the administrations of Presidents Bill Clinton and George W. Bush. Billionaire investor Warren Buffett took part by phone.

Obama said the economy needs short- and long-term fixes, including another “stimulus” from Congress…

The group agreed with Obama’s call for a second stimulus plan, although there was some debate about the size.

Obama wants to inject another $50 billion into the economy. Laura Tyson, who headed Clinton’s Council of Economic Advisers, said, “There were people in the room who felt it should be more.”

Sources:

“Infrastructure could spur new stimulus: Rep”
Richard Cowan, John Crawley, and Lisa Lambert
Reuters, July 22, 2008

“Obama gains support from economic team for a second economic stimulus plan”
Star Tribune, July 29, 2008

How Will McCain, Obama Deal With A Record Budget Deficit?

Last week, I talked about the U.S. national debt. $53 trillion of debt (factoring in long-term liabilities), or $455,000 per American household.

This week, it’s the U.S. budget deficit, which the White House predicts will reach close to half a trillion dollars in 2009. The Associated Press’ Andrew Taylor wrote earlier today:

The government’s budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn’t include, and the total could be higher yet if the economy fails to recover as the administration predicts.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Both presidential candidates have proposed new initiatives as part of their campaign platforms. The question is, how will this latest deficit forecast affect their agendas? Taylor noted:

Neither campaign is backing off campaign promises — McCain to cut taxes and Obama to expand health and education programs — in light of the bleaker new figures.

“We can’t afford not to invest in some major initiatives such as health and energy and middle-class tax cuts,” said Obama economic adviser Jason Furman. “And we also can’t afford not to pay for those initiatives.”

Some would disagree with Furman. MarketWatch’s Robert Schroeder wrote today:

Stan Collender, a managing director for Qorvis Communications who formerly worked on both the Senate and House Budget Committees, is skeptical that the next president will have an easy time getting much accomplished as long as the deficit remains high.

“Based on what we now know for sure about next year’s budget, none of the presidential candidates’ promises should be taken seriously,” said Collender. “Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president’s options will be severely limited,” Collender wrote Tuesday.

Sources:

“US deficit zooming to half-trillion as Bush leaves”
Andrew Taylor
Associated Press, July 29, 2008

“Deficit projections complicate candidates’ plans”
Robert Schroeder
MarketWatch, July 29, 2008

IMF: U.S. Home Prices Up To 20 Percent Overvalued

Reuters’ Lesley Wroughton stumbled upon a report by the International Monetary Fund last Friday which predicted more bad times were ahead for the U.S. housing market. Wroughton wrote:

The downward spiral of U.S. housing prices still has a way to go and homes were overvalued by between 8 percent to 20 percent in the first quarter of this year, according to research by an International Monetary Fund economist published on Friday.

In his report “What goes up must come down? House price dynamics in the United States,” IMF economist Vladimir Klyuev used several economic techniques to determine by how much U.S. home prices are overvalued.

Klyuev drew from a government study of single-family home prices to conclude that values were “around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent.”

His research showed that home prices became considerably overvalued from 2001 and while the housing market has started to correct itself, there is still a long way to go…

The report also said that it is likely home prices will swing well below their equilibrium level before they start to recover.

Not exactly music to the American homeowner’s ears.

Neither was the latest Standard & Poor’s/Case Shiller home price index update.

Earlier today, Reuters’ Al Yoon reported:

Prices of U.S. single-family homes plunged at a record pace in May from a year earlier, with each of the 20 regions monitored showing annual declines for a second month, according to the Standard & Poor’s/Case Shiller home price indexes reported on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas fell 0.9 percent in May from April, bringing the measure down 15.8 percent from May 2007…

Regions that saw some of the largest gains during the housing boom, such as Miami and Las Vegas, were the worst performing markets in May. Miami home prices fell 3.6 percent in May from April for a 28.3 percent annual drop. In Las Vegas, prices in May slumped 2.9 percent, for a 28.4 percent decline from a year earlier.

“Housing Bubble vs. Great Depression”
YouTube Video Link

Sources:

“U.S. house prices overvalued by up to 20 percent: IMF paper”
Lesley Wroughton
Reuters, July 25, 2008

“Home prices fell at record pace in May: S&P”
Al Yoon
Reuters, July 29, 2008

Weird Housing Tales, Part 9

I was waiting for a story like this one. From the accessAtlanta website last week:

Things couldn’t look better three years ago for Milton and Patricia Harper of Lake City, who giddily accepted the keys to a small castle, plus enough money to pay taxes on it for 25 years.

Now, the Clayton County house that “Extreme Makeover: Home Edition” built is a two-story, turreted example of how things can go wrong. It’s in foreclosure.

The Harpers used the house at 5489 Ahyoka Drive as collateral for a $450,000 loan, Clayton County mortgage records show. Records at the law firm handling foreclosures for the lender, JPMorgan Chase Bank, say it is in foreclosure. The four-bedroom house with decorative rock walls and a three-car garage is scheduled for auction on the Clayton County Courthouse steps Aug. 5.

Mark Davis, the author of the piece, said that the home took six days to build back in January 2005. Atlanta-based Beazer Homes USA and “Extreme Makeover” demolished the Harpers’ previous home due to a faulty septic system. In its place, professionals and volunteers built the largest home ever for the popular television show. Furthermore, Beazer Homes’ employees and company partners raised $250,000 for the family, which was to provide for scholarships for the three Harper children and a home maintenance fund.

Hope the $250,000 isn’t gone as well…

Source:

“‘Extreme Makeover’ home in Atlanta in foreclosure”
Mark Davis
accessAtlanta, July 25, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

Signs Of The Time, Part 18

Okay, so the following story doesn’t take place in the United States. But I’ve encountered quite a few kids here with— how should I put this— unique-sounding names. The Irish Times’ Mary Fitzgerald wrote last week:

A JUDGE in New Zealand has deplored the use of unusual children’s names after he made a nine-year-old girl called Talula Does The Hula From Hawaii a ward of court so her unfortunate moniker could be changed at her request.

Some of the rather creative names allowed by New Zealand registration officials and criticised by Judge Rob Murfitt include Number 16 Bus Shelter and Midnight Chardonnay. The judge described as “tragic” the decision to register one child under the name Violence.

The parents of twins were permitted to name their offspring Benson and Hedges, after the cigarette brand.

Among the names rejected by registration officials were Fish and Chips, Yeah Detroit, Stallion, Twisty Poi, Keenan Got Lucy and Sex Fruit. One mother even attempted to use SMS language for her daughter’s name.

And we wonder why some kids are soooooo screwed up…

“Championship Manager Kid”
YouTube Video Link

Source:

“Parents lose custody for calling daughter Talula Does The Hula”
Mary Fitzgerald
Irish Times, July 29, 2008

Quote For The Week

When I was down at the University of Illinois at Urbana-Champaign in the early nineties, I used to read the The Onion, a fake newspaper chock full of satirical articles, every once in a while. Apparently, the publication’s still going strong. From their July 14 issue:

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.

Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”

The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.

“Little pieces of paper are the next big thing,” speculator Joanna Nadir, of Falls Church, VA said. “Just keep telling yourself that. If enough people can be talked into thinking it’s legitimate, it will become temporarily true.”

Why is there a lurking suspicion that this story might not be so fake after all?

Related Posts

From our sister blog Investorazzi.com:

“Bill Gross And His Latest Investment Outlook”

“PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble.”

“Jim Rogers: Do As I Say, And As I Do”

“Rogers, who co-founded the Quantum Fund with legendary investor George Soros in the 1970s, has repeatedly said he believes China will be the next great country in the world.

‘The best gift we can give our children is to let them learn Chinese and prepare them for the future…’”

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

Jim Rogers Was Right About Wall Street And Their Maseratis

Over the past several months, legendary investor Jim Rogers has made a few comments about a certain make of car— the Maserati. Now, it doesn’t appear that Mr. Rogers dislikes Maseratis for any reason in particular. Rather, he’s been mentioning the Italian manufacturer of racing and sports cars to make a point about how out of whack things have gotten down on Wall Street. Back on June 6, Rogers told Bloomberg in an interview:

You don’t see any 29-year old cotton farmers driving around in Maseratis, but you do see a lot of 29-year olds on Wall Street driving around in Maseratis. This is not the way the world is supposed to work.

The CEO of Rogers Holdings said such a situation exists due to the tremendous excesses that have taken place in the financial communities over the past several years.

And it’s not only Wall Street traders who have been associated with the exotic sports car. Investment bankers too. Yet, they almost came close to losing theirs a few months ago— if it weren’t for their pals over at the Federal Reserve. Rogers told Bloomberg on March 17:

And here he [Fed Chair Ben Bernanke] goes and gives more of our money to Bear Stearns so these guys can continue to drive around in their Maseratis… The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders Maseratis.

Looks like Jim was right about Maserati being the vehicle of choice down on Wall Street. While surfing the web yesterday, I happened to notice that Bloomberg.com had posted a review of the $115,000 Maserati GranTurismo on their site. Bloomberg’s Jason Harper wrote:

The Maserati GranTurismo delivers on a quality increasingly rare in the auto world: beauty. Put it against any dozen modern cars and the GT’s supple lines, perfect swells and ideal dimensions will outshine them all.

At $115,000 it’s not exactly a drop in the bucket, yet those exotic looks leave most people thinking it’s as expensive as a Ferrari.

Don’t fret, Wall Streeters. A few more taxpayer bailouts here, and some government interference/market manipulations there, and you’ll have enough of Main Street’s hard-earned cash to finally afford that Ferrari…

Jamiroquai, “Cosmic Girl” (1996)
YouTube Video Link

Sources:

Jim Rogers Interview
Bloomberg News Video
Bloomberg, June 6, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Maserati GT, $115,000, Evokes Classic Beauty of Italian Coupes”
Jason H. Harper
Bloomberg, July 23, 2008

Homeowners, You Don’t Want To Read This

Last Sunday, Kevin Hall from McClatchy Newspapers (the third largest newspaper company in the United States) talked about the direction of the U.S. housing market. He wrote:

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have suggested over the past year that an end is in sight. But with each prediction, things have grown worse. For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.

Most of Hall’s piece focused on research by Mark Vitner, a senior economist for Wachovia, and Mark Zandi, chief economist for Moody’s Economy.com. Vitner told Hall:

I don’t think we get strengthening in the housing market until late 2011 or 2012… I think we’re somewhere between halfway and two-thirds of the way through the correction.

The Wachovia economist, who closely studies U.S. home price trends/sales and released a report back on July 14 entitled “How Far Will Housing Prices Fall,” predicts that prices will fall 22% to 29% on average from their peak before a bottoming out occurs. The median home price has lost about 11% since peaking in October 2005.

The housing forecast from Mark Zandi, chief economist for Moody’s Economy.com, is not much better. Zandi said:

My view is that we are two-thirds through the housing downturn, at least as measured by house price declines. The price declines began in late spring 2006 and will more or less come to an end in late spring 2009. The Fannie-Freddie debacle may push this out into the summer or even fall of 2009.

Zandi believes that unless the chaos in the financial sector is resolved, his forecast of a bottom in 2009 “will prove too bright.”

Identifying the bottom is even more trickier when historical trends no longer apply to a housing market that’s experiencing an unprecedented decline. Hall wrote:

Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months.

Don’t hold your breath though. Someone will be waiting in the wings ready to give anyone who’ll listen an unhealthy dose of jawboning about how a housing recovery is just around the corner.

Source:

“Housing prices haven’t hit bottom yet”
Kevin G. Hall
McClatchy Newspapers, July 20, 2008

When All Else Fails, Re-Invent The Economics

I know CNBC has the reputation of being a cheerleader for stocks, but really now. The following appeared on the CNBC website this morning:

U.S. crude oil inventories fell much more than expected last week, keeping downward pressure on already weak oil prices.

Crude inventories fell by 1.6 million barrels for the week ended July 19, the Energy Information Administration reported… On average, analysts were predicting crude inventories to have fallen by 700,000 barrels.

So, when did declining supply ever put “downward pressure” on the price of oil, or any other commodity?

To be fair, I can’t directly fault CNBC for this. Their source for the material was Reuters.

Probably just a typo then, right. Right?

Source:

“Oil Hovers Near $126 after Big Drop in Crude Inventories”
CNBC/Reuters, July 23, 2008

How Politicians Make Themselves Look Stupid, Part 2

Yesterday, I noted in part 1 that Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” Tuesday morning to scare off crude oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices.

CNN Money picked up on the findings, which you can watch here. The segment lasts 1 minute 46 seconds.

Source:

“CFTC: No oil market manipulation”
Video
CNN Money, July 23, 2008