Week of May 26, 2008

Sunday, June 1, 2008, 6:05 AM

Weekend Spacer
May 31

America's house prices are falling even faster than during the Great Depression

AS HOUSE prices in America continue their rapid
descent, market-watchers are having to cast back ever further for
gloomy comparisons. The latest S&P/Case-Shiller national
house-price index, published this week, showed a slump of 14.1% in the
year to the first quarter, the worst since the index began 20 years
ago. Now Robert Shiller, an economist at Yale University and
co-inventor of the index, has compiled a version that stretches back
over a century. This shows that the latest fall in nominal prices is
already much bigger than the 10.5% drop in 1932, the worst point of the
Depression. And things are even worse than they look. In the
deflationary 1930s house prices declined less in real terms. Today
inflation is running at a brisk pace, so property prices have fallen by
a staggering 18% in real terms over the past year.

House Prices Falling

Wow! Wow. Wow. What an incredible picture.
Even as the Federal Reserve throws hundreds of billions of dollars into
the coffers of big banks and the US financial press works over time to
convince us that the crisis is over, we have the picture above to
remind us that this crisis is NOT entirely about the liquidity that the
Fed has been injecting. Instead the heart of the crisis will be about

Insolvency formed from the millions of homeowners who
either can’t or have no intention of paying pack the money they
borrowed to buy houses that are now worth far, far less than they paid
for them. Houses are bought by people while the Fed is concentrating
all its firepower on the institutions. While the Fed shovels money into
the institutions to stave off a massive liquidity crisis, equity is
being destroyed out in the real world at an even faster pace. The most
important part about that graph above?

If inflation is running at
3.5% (as the government falsely claims, but let’s accept that for the
moment) and house prices have fallen by 14% in the past year meaning
that the average home purchase over the last year has returned a
staggering -18%. Once we factor in a 6% mortgage, but subtract out 2%
for the tax benefit, we find that homes are, on average returning -22%
right now.

No wonder home sales are off so dramatically. It turns
out that once the smoke from a bubble clears, people will make rational
decisions, and right now the most rational decision regarding home
purchases seems to be to wait, rather than try to catch a falling knife.

Tax rebates fail to spark consumer spending (May 30 – Houston Chronicle)

U.S. personal spending slowed in April after record
fuel costs, a slump in home values and a deteriorating job market
hammered consumer confidence.

The economy grew at a 0.9
percent annual rate in the first quarter, more than previously
estimated, as the trade deficit shrank to a five-year low, revised
Commerce figures showed yesterday. Consumer spending rose at a 1
percent pace last quarter, the smallest gain since the 2001 recession.

government is counting on its economic stimulus initiative to revive
growth. The Treasury last week said it sent $4.9 billion in tax rebates
in the fourth week of the program, raising the total distributed so far
to $45.7 billion.

The extra money may not bring much relief.
Households will spend about $90 billion more this year on gasoline if
fuel prices remain at current levels, according to a forecast by
economists at Credit Suisse Holdings in New York. That will consume
about 80 percent of the more than $110 billion in rebate checks being

My contention all along has been that the
government moves too slowly to really impact the economy in a
meaningful way. I’m sure the stimulus checks made a lot of sense at the
time in somebody’s spreadsheet, but now they are pitiful compared
against just the increase in fuel costs alone.

Worse, for the
grow-at-all-costs crowd at any rate, is that there are clear signs that
cheap is the new chic and that savings are returning to favor with

As with housing, consumer behaviors and mindsets are
very hard to change once they become established. For now consumers are
convinced the housing market is dead and they have started to reel in
their purchases. What is unclear is how an economy so laden with debt
will respond to fall off in demand. I have my concerns.

Friday As Oil Prices Soar, Restaurant Grease Thefts Rise (May 30, 2008 – NYT)

The bandit pulled his truck to the back of a Burger
King in Northern California one afternoon last month armed with a hose
and a tank. After rummaging around assorted restaurant rubbish, he
dunked a tube into a smelly storage bin and, the police said, vacuumed
out about 300 gallons of grease.

Outside Seattle, cooking oil
rustling has become such a problem that the owners of the Olympia Pizza
and Pasta Restaurant in Arlington, Wash., are considering using a
surveillance camera to keep watch on its 50-gallon grease barrel. Nick
Damianidis, an owner, said the barrel had been hit seven or eight times
since last summer by siphoners who strike in the night.

“Fryer grease has become gold,” Mr. Damianidis said. “And just over a year ago, I had to pay someone to take it away.”

to the surprise of Mr. Damianidis and many other people, processed
fryer oil, which is called yellow grease, is actually not trash. The
grease is traded on the booming commodities market. Its value has
increased in recent months to historic highs, driven by the even higher
prices of gas and ethanol, making it an ever more popular form of
biodiesel to fuel cars and trucks. In 2000, yellow grease was trading
for 7.6 cents per pound. On Thursday, its price was about 33 cents a
pound, or almost $2.50 a gallon.

One of the things that I’ve heard from a
lot of people goes along the lines of “when things get tight I’ll
just…” and you can fill in the blank from here. “Hunt for my food” is
one common refrain.

Another is “I’ll get a diesel car and run on
all the surplus grease that’s lying around.” First, by the time the
average person figures out how to hunt, there won’t be any living
animals left to eat, and second, the grease is already disappearing at a
fantastic clip. And, as this article makes clear, once things get even
slightly tight, as we’ve recently seen in the energy markets, even the
smallest of seams will get exploited.

Already grease is no longer
an unwanted by-product. It is a highly concentrated form of energy and
now fetches $2.50 a gallon. Boom. No more surplus grease lying around.
Now whatever has not been sold is routinely stolen.

Oil Exporters Are Unable To Keep Up With Demand (May 29 – WSJ)

The world’s top oil producers are proving unable to
put more barrels on thirsty world markets despite sky-high prices, a
shift that defies traditional market logic and looks set to continue.

data from the U.S. Department of Energy show the amount of petroleum
products shipped by the world’s top oil exporters fell 2.5% last year,
despite a 57% increase in prices, a trend that appears to be holding
true this year as well.

There are several reasons behind the
net-export decline. Soaring profits from high-price crude have fueled a
boom in oil demand in Saudi Arabia and across the Middle East, leaving
less oil for export. At the same time, aging fields and sluggish
investments have caused exports to drop significantly in Mexico, Norway
and, most recently, Russia. The Organization of Petroleum Exporting
Countries also cut production early last year and didn’t move to boost
supplies again until last fall.

Okay, folks. This is it. Now that the concept
of Peak Oil, or at least declining production and exports from the top
producers, is in the Wall Street Journal, it’s pretty close to being
widely recognized as real.

Last week I wrote about and provided
links to stories about the Export Land Model, which very simply states
that declining production and higher internal demand is a double whammy
to a country’s exports. And now here it is being openly talked about in
the WSJ.

This has the potential to shift our economic landscape at
a very, very fast pace, especially here in the Northeast, where the
majority of home heating is provided by oil furnaces and the
suburb/commute model is dominant.

British PM warns of global oil 'shock'

British Prime Minister Gordon Brown warned
Wednesday that the world faced an era-defining oil "shock" that
required urgent action, as European leaders struggled to contain
growing protests over soaring fuel prices.

"It is now understood that a global shock on this scale requires global solutions," Brown wrote in The Guardian newspaper.

Record oil prices of around 135 dollars a barrel have contributed to
protests worldwide over the rise in fuel and food costs, with fishermen
and truck drivers taking the lead in Europe, blocking ports and road
access to oil depots.

"However much we might wish otherwise,
there is no easy answer to the global oil problem without a
comprehensive international strategy," Brown said, adding that the
problem should be made a "top priority" at the EU summit next month and
the gathering of G8 leaders in July.

"The way we confront these issues will define our era," he said.

I don’t have a huge amount of respect for
the ability of Gordon Brown to chart a correct course, because he made
the decision to sell off a large portion of England’s gold holdings at
the exact lowest possible moment in price back in 2001.

But here
I find myself agreeing with him that a global oil shock is on the way,
it will require a comprehensive international strategy, and that "The
way we confront these issues will define our era.”

Double, double, oil and trouble (May 29 – The Economist)

[T]he most popular scapegoats are “speculators” of
the more traditional sort. OPEC itself routinely blames them for high
prices. The government of India is so sure that speculation makes
commodities dearer that it has banned the trading of futures contracts
for some of them (although not oil).

Germany's Social
Democratic Party proposes an international ban on borrowing to buy oil
futures, on the same grounds. Joe Lieberman, chairman of the Senate's
Homeland Security Committee, is also mulling regulation of some sort,
having concluded that “speculators are responsible for a big part of
the commodity price increases”. The assumption underlying such ideas is
that a bubble is forming, and that if it were popped, the price of oil
would be much lower.

Others assume the reverse: that the price
is bound to keep rising indefinitely, since supplies of oil are running
short. The majority of the world's crude, according to believers in
“peak oil”, has been discovered and is already being exploited. At any
rate, the size of new fields is diminishing. So production will soon
reach a pinnacle, if it has not done so already, and then quickly
decline, no matter what governments do.

As different as these
theories are, they share a conviction that something has gone badly
wrong with the market for oil. High prices are seen as proof of some
sort of breakdown. Yet the evidence suggests that, to the contrary, the
rising price is beginning to curb demand and increase supply, just as
the textbooks say it should.

While politicians and financialists in
America turn the spotlight of blame on “speculators” in an attempt to
keep the light off of themselves, the Economist comes out with a
brilliant article explaining that it’s not quite so simple as that.
Like a too simplistic claim that the Iraq war was “all about oil,”
attempting to assess the impact of a single factor where a multitude of
intertwined factors exist is a foolish exercise.

I’ll be writing more about this very complex subject this weekend. Until then, READ THIS ARTICLE

May 29

It’s not an Oil Crisis it’s a Dollar Crisis (May 27– Financial Sense)

It’s unfortunate that the Supreme Court, in its
ruling this week that U.S. currency is unfair to the blind, did not
make the next logical step and declare it unfair to everyone who buys

In their search for explanations as to why oil has
surged past $130 per barrel, Washington, Wall Street, and the financial
media are as clueless as cavemen after a freak summer snow storm.
Despite the head scratching, the blame game is nevertheless in full
force. Speculators and big oil companies are being trotted out as
scapegoats, and increased margin requirements and taxes on windfall
profits and futures trading have been mentioned as appropriate
sanctions. It should be clear that this is pure farce, and that no one
understands what is actually happening.

The reality is that
after years of reckless consumption and dollar debasement, Americans
are now being priced out of markets over which they formerly held
unchallenged title. As more affluent foreigners consume more of the
resources and products they previously supplied to us, Americans are
being forced to cut back. The rising dollar-based price of gasoline is
simply an illustration of this global trend.

Peter Schiff
gets it, although I would go one step further and say that the oil
prices we are witnessing are a “fiat currency crisis.” The US dollar is
poorly managed, but not grossly so when compared to the Yen, the Ruble,
and the Euro. All of these currencies are experiencing very high rates
of growth. The true mystery to me is why so many big time investors
still waste their time shifting back and forth between the various
currencies trying to pick the “best one.” They are all sinking, it’s
just that some are sinking faster than others. As for the excellent
point that US consumers are getting priced out of key markets for key
supplies, read the next shocking article.

Natural Gas in Pause Mode (May 29 NYT CAMERON PARISH, LA)

The cost of a gallon of gas gets all the headlines,
but the natural gas that will heat many American homes next winter is
going up in price as fast or faster.

A longstanding
assumption of American energy policy has been that natural gas would be
plentiful abroad, and therefore readily available for importation, as
production falls off in North America, where many fields are tapped

Just about the only place where demand for L.N.G. seems
not to be growing is the United States, an abrupt shift from
expectations as little as one year ago. [Experts predict that] American
gas suppliers will eventually be willing to pay the higher world prices
on the spot market, especially if a gas shortage ensues after a
punishing hurricane season or frigid winter.

This is a
shocking article to me, because it details the billions of dollars that
US companies have invested preparing to import Liquefied Natural Gas
(LNG), yet those assets are sitting idle because the rest of the world
is willing to pay more for LNG than we are. Wow. Priced out? Our own
domestic NG production is well past peak and declining, and we need NG
for electricity, manufacturing, and industrial feedstocks. Having
sufficient NG is pretty much a non-negotiable element of our current
way of running things.

Storms on the Horizon - Remarks before the Commonwealth Club of California (May 28 – FRB Dallas)

Doing deficit math is always a sobering exercise.
It becomes an outright painful one when you apply your calculator to
the long-run fiscal challenge posed by entitlement programs. Were I not
a taciturn central banker, I would say the mathematics of the long-term
outlook for entitlements, left unchanged, is nothing short of

What is the mathematical predicament of Social
Security today? Answer: The amount of money the Social Security system
would need today to cover all unfunded liabilities from now on — what
fiscal economists call the "infinite horizon discounted value" of what
has already been promised recipients but has no funding mechanism
currently in place — is $13.6 trillion, an amount slightly less than
the annual gross domestic product of the United States.

Please sit tight while I walk you through the math of Medicare. As you
may know, the program comes in three parts: Medicare Part A, which
covers hospital stays; Medicare B, which covers doctor visits; and
Medicare D, the drug benefit that went into effect just 29 months ago.
The infinite-horizon present discounted value of the unfunded liability
for Medicare A is $34.4 trillion. The unfunded liability of Medicare B
is an additional $34 trillion. The shortfall for Medicare D adds
another $17.2 trillion. The total? If you wanted to cover the unfunded
liability of all three programs today, you would be stuck with an $85.6
trillion bill. That is more than six times as large as the bill for
Social Security. It is more than six times the annual output of the
entire U.S. economy.

This speech,
given by a sitting Federal Reserve Board member, is really quite
startling in its honesty and clarity. While the whole thing is worth a
read, I’ve excerpted those parts that point out that the underfunding
of our entitlement programs is roughly 7 times larger than our current
economy. That’s 700% bigger. The implication of this shortfall is that
retiring baby boomers will have to sell even more of their own assets
to cover the gap.

The numbers here
are simply staggering. Heard any politicians talking about this lately?
Nope, me neither. All I hear is that Wall Street is very satisfied with
the hundreds of billions of (your) dollars that the Fed has thrown its
way as a reward for making some truly horrible investment decisions.

[UK] House prices fall by biggest margin in 17 years (May 29 – UK Telegraph)

House prices fell by 2.5 per cent this month - the
biggest monthly drop since records began 17 years ago, according to
Nationwide figures.

The drop in prices during May also
represented a seventh successive month of falls, the longest
consecutive period of decline since 1992 when Britain was emerging from

This merely goes
to show that the credit bubble is (was) global in nature. This goes a
long way towards explaining why the central banks of the world have
been working so closely together to prop up each other's currencies and
economies. If one goes, they all go.
These sorts of asset price drops are unprecedented and not to be taken lightly.

From my
perspective as a very close market observer (I am generally watching
price movements on a continuous basis throughout the day), there have
been more numerous and larger “official interventions” in our financial
markets that extend well beyond the interest rate and currency markets,
which banks openly admit to either setting or influencing.

How long can they play this game? Who knows.

US and European debt markets flash new warning signals (May 29 – UK Telegraph)

"The steep rise in swap spreads this week is
ominous," said John Hussman, head of the Hussman Funds. "The
deterioration is in stark contrast to what investors have come to hope
since March."

Willem Sels, a credit analyst at Dresdner
Kleinwort, said the banks are beginning to face waves of defaults on
credit cards, car loans, and now corporate loans. "We believe we're
entering Phase II. The liquidity crisis has eased a little, but the
real credit losses are accelerating. The worst is yet to come," he

The jump in corporate bankruptcies has not yet been
picked up by the usual indicators, which tend to lag the market,
lulling investors into a false sense of security. The true losses are
already known to specialists in the business, said Mr Sels.

Even as the US
stock market bravely climbs back every day, and the US press is filled
with headline stories about how the credit crisis is behind us,
the signs below
the surface are still awful - and they are getting worse. Now we enter
“Phase II,” where the real credit losses have to be recognized.
you know, sooner or later all those delinquent loans were going to have
to show up on somebody’s earning statement. For now the real losses
have been largely hidden from view on Wall Street balance sheets. Not
for much longer, in my view.

Stagflation is back. Here's how to beat it (May 28 – Fortune Magazine)

Three decades ago, in a bleak stretch of the 1970s,
an economic phenomenon emerged that was as ugly as its name:
stagflation. It was the sound of the world hitting a wall, a
combination of no growth and inflation. It created an existential
crisis for the global economy, leading many to argue that the world had
reached its limits of growth and prosperity. That day of reckoning was
postponed, but now, after a 30-year hiatus, at least a mild bout of
stagflation has returned, and matters could get much worse.

implications are clear and sobering. Our global resource binds are much
tighter now than in the 1970s, because the world economy is that much
larger, the resource constraints are tighter, and quick fixes are
harder to find. In 1974 the world population was four billion, and
total world income was around $23 trillion (in today's dollars adjusted
for purchasing power). Now the world population is 6.7 billion, and the
economy is around $65 trillion. The same annual growth rate of the
world economy, say 4% per annum, requires vastly more natural resources
- energy, water, and arable land - than in the 1970s and poses much
larger risks for the world's climate and ecosystems.

We are
therefore facing a prolonged period in which global economic growth
will be constrained not by broad macroeconomic policies or market
institutions, nor by limits of global trade, nor by the general ability
of today's emerging markets to invest in new industries. The more
pressing limits will be in resources and a safe climate. It took 15
tumultuous years to overcome the limits on energy and food after 1973.
Unless we act more cleverly today, we could face an even more harrowing
and prolonged adjustment ahead.

This is an
excellent article and worth your time to read. The author makes the
point that we face some structural shortfalls in our desire/need for
real goods and what the earth can currently provide. Sure, we can
always make some adjustments, like find ways to do more with less, and
this is where he makes the case that we should be looking for our
opportunities. But those take time…and we are currently expending our
political energy denying that the crisis even exists.

Triple-A Failure (April 27 – NYT Magazine)

The business of assigning a rating to a mortgage
security is a complicated affair, and Moody’s recently was willing to
walk me through an actual mortgage-backed security step by step. I was
led down a carpeted hallway to a well-appointed conference room to meet
with three specialists in mortgage-backed paper. Moody’s was
fair-minded in choosing an example; the case they showed me, which they
masked with the name "Subprime XYZ," was a pool of 2,393 mortgages with
a total face value of $430 million.

Moody’s assigned an
analyst to evaluate the package, subject to review by a committee. The
investment bank provided an enormous spreadsheet chock with data on the
borrowers’ credit histories and much else that might, at very least,
have given Moody’s pause. Three-quarters of the borrowers had
adjustable-rate mortgages, or ARMs — “teaser” loans on which the
interest rate could be raised in short order. Since subprime borrowers
cannot afford higher rates, they would need to refinance soon. This is
a classic sign of a bubble — lending on the belief, or the hope, that
new money will bail out the old.

This article is
a month old, but it gives an exceptionally clear inside view of how the
credit crisis was enabled by the jokers at the credit rating agencies.

If you are of a
mind to understand this dynamic, you won’t find a better article to
read. It’s long….runs 6 internet pages, but is very readable.

May 28

Corn Costs Signal Biggest Beef Surge Since 2003 as Herds Shrink (May 27 Bloomberg)

Enjoy your next steak, because prices from Shanghai
to San Francisco are only going up. The highest corn prices since at
least the Civil War, based on Chicago Board of Trade data, mean U.S.
feedlots are losing money on every animal they sell, discouraging
production as rising global incomes increase meat consumption and a
declining dollar spurs exports. Cattle may rise 13 percent by the end
of the year on the Chicago Mercantile Exchange and Brazil's Bolsa de
Mercadorias e Futuros, futures contracts show.

In the latest
Martenson Report, I talk about my concern that inflation has now become
embedded within the system. This article is a perfect example of that
phenomenon. Corn is going up because energy is going up. On the one
hand, it simply costs more to grow corn, and on the other hand, corn is
being grown and diverted to use as an energy product. Now that higher
energy costs have forced corn to go up, beef will go up.

Once beef goes
up (along with everything else that uses energy), people will demand
higher raises. This is a vicious circle that is hard to break. After
all, where would one break the chain? The dishonest and foolish way
would be via government-enforced price controls at one or more points
along the supply chain. The honest and correct way would be to reign in
our monetary and deficit spending excesses.

Dow Chemical hikes prices 20 percent, citing energy (May 28 – Reuters NEW YORK)

Dow Chemical Co (DOW.N: Quote, Profile, Research),
the biggest U.S. chemical manufacturer, said on Wednesday it would hike
prices for all its products by up to 20 percent next month, the latest
signal that escalating energy prices were stoking inflation. Citing a
sharp rise in the costs of energy, raw materials and transportation,
Dow will raise prices globally on its broad slate of products that
range from plastics and films to paints and agricultural supplies from
June 1.

And here’s your
second example of the inflationary process. As a direct consequence of
spiking energy costs, Dow Chemical will be raising their prices by 20%.
This is a severe step for Dow to take. 20% is a large amount, and they
are doing it right at the outset of a recession. You can be sure that
Dow management thought long and hard about this but ultimately had no
choice. If this results in reduced demand for their products, the next
step will be an announcement like that of Ford, below.

Ford may cut up to 2,000 salaried jobs (May 28 – AP DETROIT)

A newspaper report says Ford Motor Co. may cut its
U.S. salaried work force by up to 12 percent, or more than 2,000 jobs,
as it tries to keep its restructuring plan on track amid slumping sales
and record-high gas prices. The Detroit News reported Wednesday that
some employees were told about planned involuntary layoffs of about 10
percent — or as high as 12 percent — during a town hall-style meeting
on Friday.

Even as Wall
Street attempts to convince us that “the worst is behind us” and that
“our liquidity crisis is over," in the real world, where people live,
shop, and work, the signs continue to point to hardship and economic
shrinkage. If you haven’t seen the pictures of the impact the decline
of US auto manufacturing has had on Detroit, you really should. Whole
communities are essentially desolate wastelands with houses selling for
as little as $1.

Shell sees end of 'easy oil' era (May 27 – BBC)

The boss of Shell UK, the London-based arm of the
Anglo-Dutch oil company, has warned the era of "easy oil" is over. In
an interview with the BBC, James Smith said that energy companies were
having to go to ever more extreme lengths to sustain production. "The
challenges are huge. We've now got 30,000 technologists in Shell alone
trying to find new ways to get oil and gas," Mr Smith revealed.

And, of course,
the end of easy oil is the same thing as saying the end of cheap oil.
The impact of expensive oil is revealed in the stories (above) about
beef and chemical products. Once expensive energy works its way into
the system, it is nearly impossible to get it out quickly or easily, if
at all. Energy is so prevalent in everything we do or consume that it
is all too easy to take it for granted.

Russia worried as oil production slides (May 27 – Hindustan Times)

Russia's government has proposed urgent measures to
halt a slide in oil production, which threatens to undermine the
country's petroleum-fuelled economic boom. News of falling oil output
has hit Moscow political circles like a bomb, because energy exports
now make up over 30 per cent of Russia's gross domestic product and
account for almost 70 per cent of government revenue.

Russia is scrambling to address the slide in production. While it may
be true that Russia suffers to some extent from a lack of investment
and shoddy management, it is not at all clear that fixing these issues
would guarantee a return to former levels of oil production. If it
turns out that Russia has peaked, then I would expect that we have at
most 2-3 years to full, global recognition that the world has peaked.
At that point, everything will change.

Has Russian oil output peaked? (May 28 – Christian Science Monitor)

As the world's second-largest oil exporter, Russia
joins a growing number of top oil suppliers wrestling with how to
address declining or peaking production. Like Venezuela and Mexico,
Russia is heavily dependent on oil, which accounts for more than
two-thirds of government revenue and 30 percent of the country's gross
domestic product.

Now, Moscow is trying to remedy a situation
caused in part by outdated technology, heavy taxation of oil profits,
and lack of investment in oil infrastructure.

After rising
steadily for several years to a post-Soviet high of 9.9 million barrels
per day (bpd) in October, Russian oil production fell by 0.3 percent in
the first four months of this year, while exports fell 3.3 percent –
the first Putin-era drop.

Russia's proven oil reserves are a
state secret, but the Oil & Gas Journal, a US-based industry
publication, estimates it has about 60 billion barrels – the world's
eighth largest – which would last for 17 years at current production

This excellent article has even more context about the Russian oil production situation and is worth a read.

May 27

Case-Shiller U.S. Home-Price Index Falls 14.4% (May 27 - Bloomberg)

Home prices in 20 U.S. metropolitan areas fell in
March by the most in at least seven years, pointing to weakness in the
housing market that will constrain economic growth.

S&P/Case-Shiller home-price index dropped 14.4 percent from a year
earlier, more than forecast and the most since the figures were first
published in 2001. The gauge has fallen every month since January 2007.

continue to slide as record foreclosures put more homes on the market
and stricter lending standards make it harder to get loans. Falling
home values are slowing consumer spending, threatening to halt the
six-year expansion.

"There is excess supply, weakening demand,
prices are falling and will continue to fall," said Kevin Logan, senior
market economist at Dresdner Kleinwort in New York. "Housing sales are
still trending lower."

Nineteen of the 20 cities in the index
showed a year-over-year decrease in prices for March, led by a 26
percent slump in Las Vegas and a 25 percent decline in Miami. Charlotte
was the only area showing a gain with a 0.8 percent increase.

the claims being made by many realtors and others who would wish the
housing slump to be gone, the Case-Shiller price index continues to
reveal a slump that is exceptionally broad-based and still heading
downwards. There is no sign of a bottom yet, and house prices are
losing value at a faster rate, not a slower rate. This downturn is, in
a word, unprecedented. Worse than the Great Depression, and therefore
worthy of your highest attention. At its peak total, real estate
holdings were valued at ~ $21 trillion. A 14.4% slump implies the loss
of more than $3 trillion dollars from household net worth. So what does
this mean? It means a slump in consumer spending, declining consumer
confidence, and a very high risk that bank-mortgage-related losses will
exceed bank capital.

Auto Industry Feels the Pain of Tight Credit (May 27 – NYT)

The auto industry is getting sideswiped by the housing crisis.

Auto lenders and banks, closing their wallets, have prevented hundreds
of thousands of consumers from obtaining the financing for a car. Home
equity loans, which had been used in at least one of every nine deals,
when lenders were more generous, are no longer a source of easy money
for many prospective buyers. And used-car prices have fallen nearly 6
percent as repossessed cars and gas-guzzling trucks and S.U.V.’s flood
auction lots.

Those forces, on top of the softening economy,
are putting enormous pressure on the American auto industry as it faces
what may be its worst year in more than a decade. About 15 million
vehicles are expected to be sold in 2008, down from 16.2 million last
year, as sales reach the lowest levels since 1995, according to the
marketing firm J. D. Power & Associates.

"It is a bleak
picture, and it all hinges on the availability of financing," said
William Ryan, a financial analyst at Portales Partners who has followed
the auto business for years. "The whole universe related to the auto
industry is touched in some way — parts suppliers, manufacturers,
salespeople, trucking people, the paint and metals industries. Even

Housing is
a huge portion of the economy, and it's clearly in a recession. Autos
are also clearly in recession. More broadly, manufacturing has been in
a recession for 15 years. So what's left? What sector of the economy is
going to fill those shoes? Beats me, but plenty of Wall Street
economists are predicting an imminent turnaround. Alas, they always
fail to provide any clues as to which sectors they predict will pick up
the slack.

Confidence Falls as Home Values Decline (May 27 – Bloomberg)

Confidence among American consumers fell in May to
the lowest level since 1992 as the two-year housing slump showed no
sign of bottoming.

The Conference Board's confidence index declined more than forecast to 57.2, the New York-based research group said today.

The slide in home values, along with gasoline near $4 a gallon and
rising unemployment, threatens to hobble the consumer spending that
accounts for more than two-thirds of the economy.

To put it
bluntly, our economy is in many respects a Ponzi economy. It requires
ever-greater borrowing and indebtedness simply to stay in place. In any
pyramid scheme, the most important variable is confidence. If people
are not confident about the future they tend to limit their spending to
what they actually have, and that, unfortunately, is wholly
insufficient for our economy and banking system.

Trichet's Inflation Aim Proves `Fiction' After Decade (May 27 - Bloomberg)

Jean-Claude Trichet's European Central Bank hasn't
had much success hitting its inflation target. The fault may lie with
the goal itself.

"The ECB's keeping up a fiction," says
Joachim Fels, co-chief economist at Morgan Stanley in London. "The
trade-off between growth and inflation has really changed. They should
be as open as possible by adjusting the target."

Frankfurt-based central bank, marking its 10th anniversary June 1, has
failed in each of the last eight years to achieve its aim of bringing
inflation below 2 percent.

That forces an unpleasant choice
on President Trichet and his colleagues: They can keep striving to
force inflation lower by holding interest rates higher, at the cost of
crippling faltering economies such as Italy's. Or they can yield to
demands to set an easier target -- something Trichet says he won't
consider "for one second" -- and risk letting inflation erode stronger
economies such as Germany's.

Sticking with the current number
may result in "a pyrrhic victory by pushing inflation within target but
having destroyed the real economy," says Thomas Mayer, chief European
economist at Deutsche Bank AG in London.

Trichet's Defense

Trichet, 65, recently stepped up defense of his goal, arguing May 8
that a revision would "unanchor" inflation expectations. He maintains
that investors "have not lost faith"
in the ECB's ability to
deliver price stability and that only temporary "shocks" have caused
its ceiling to be breached. Support for his view came this month as an
ECB survey of private forecasters showed they expect long-term
inflation to slow to 1.9 percent.

The short term is a
different story. Prices rose at an annual rate of 3.6 percent in March,
the fastest pace in almost 16 years, and Barclay's Capital and Societe
Generale SA say inflation has yet to peak.

Even the ECB's own economists, who have underestimated inflation every year since 2001,
are predicting prices will rise at a 2.9 percent rate this year, the
biggest increase since 1993. The outlook is forcing the ECB to hold its
key interest rate at a six-year high of 4 percent, even as growth slows.

This is a
really telling article, which is why I excerpted so much of it. Here we
see the same sort of rot and rationalized thinking in the European
monetary system that infects the US Federal Reserve. First, they use
bad statistics and routinely underestimate and understate inflation.
Second, they worry more about "expectations" becoming "unanchored" than
they do about the ruinous impact of their inflationary policies upon
their own people and the rest of the world. More to the point, this
confirms my view that the world's monetary authorities are hell-bent on
pursuing an inflation-based rescue policy regardless of the costs.
Which is why I continue to recommend inflation hedges (gold, silver,
oil, etc) as the best investments.

An Old Enemy Rears Its Head (May 22 - The Economist)

EVEN as America's economy teeters on the brink of
recession and many European economies are slowing, central bankers in
rich countries fear rising inflation. Yet the risks they face are
smaller than those in emerging economies, where inflation has risen far
more over the past year to its highest for nine years. There are also
an alarming number of similarities between developing economies today
and developed economies in the early 1970s, when the Great Inflation
took off. Are the young upstarts heading for trouble?

official rate of consumer-price inflation is at a 12-year high of 8.5%,
up from 3% a year ago (see chart 1). Russia's has leapt from 8% to over
14%. Most Gulf oil producers also have double-digit rates. India's
wholesale-price inflation rate (the Reserve Bank's preferred measure)
is 7.8%, a four-year high. Indonesian inflation, already 9%, is likely
to reach 12% next month, when the government is expected to raise the
price of subsidised fuel by 25-30%.

Inflation in Latin
America remains low relative to its ignominious past. Even so, Brazil's
rate has risen to 5% from less than 3% early last year. Chile's has
leapt from 2.5% to 8.3%. Most alarming are Venezuela, where the rate is
29.3%, and Argentina. Officially, Argentina's inflation rate is 8.9%,
but few economists believe the numbers. Morgan Stanley estimates that
the true figure is 23%, up from 14.3% last year.

official figures understate inflationary pressures in many emerging
economies. Widespread government subsidies and price controls are one
reason, and price indices are often skewed by a lack of data or
government cheating.
China's true inflation rate may be higher
because the consumer-price index does not properly cover private
services. Delays in data collection in India can mean big revisions to
inflation: the final number for early March was almost two percentage
points higher than the original.

The latest wholesale-price
inflation rate might therefore be pushed up to 9-10%. If measured
correctly, five of the ten biggest emerging economies could have
inflation rates of 10% or more by mid-summer. Two-thirds of the world's
population may then be struggling with double-digit inflation.

Oh, this is
rich! Talk about the pot calling the kettle black. The western
economies have some of the most sophisticated statistical methods of
understating inflation, but the charge is leveled that we probably
can't trust the official figures of emerging economies. While this may
be true, it should be said in the same breath that we probably can't
trust any inflation figures that are gathered and reported by the same
parties who have an economic, policy-related, or political interest in
having them be as low as possible. However, that's a side issue. The
main point of this otherwise very important article is that inflation
is now embedded within the world economy at all levels and is therefore
going to take a relatively long time to dissipate.

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