Job Growth Missing In Action

Jobless claims staying over 500,000 may cause more worry about economic recovery turning into a double-dip recession. While the crowd has been conditioned to expect extreme outcomes due to recent events, we should be careful not to be overly pessimistic or optimistic says James Picerno. See the following article from The Capital Spectator.

The danger is not the past, but the future.

Today’s update on weekly jobless claims may be the warning sign. New filings for jobless benefits were unchanged last week, hovering at 505,000, matching the previous week’s tally. Although this number is down sharply from it’s recessionary peak of 674,000, set back in late-March, 500k reflects distress in the labor market. In other words, job growth is largely MIA.

It’s too soon to tell if the drop in claims is stalling. But there’s a case to be made that the big, easy reductions are behind us. As we discussed many times this year, there was always a strong case that a snapback on multiple economic and financial levels was in the offing for 2009. Unless the system was truly headed for a collapse, the natural order of the business cycle was righting itself after such a sharp deviation from equilibrium. In short, much of the events in 2009, particularly since the spring, aren’t a huge surprise to students of economic history. But the world is likely to become increasingly nuanced and complicated, and not necessarily for the better.



We’ve commented often in 2009 that the main threat was a stalled rebound in the job market. The risk was less about a double dip recession and another cataclysm and more of meager growth in the all-important labor market. Today’s data point in jobless claims isn’t proof that our forecast is turning into reality, but neither does the latest number do anything to dispel our worry of what may be looming.

The crowd’s been taught to expect that extreme outcomes are the new norm, courtesy of the drama of the past year or so. But we think the hazards will come quietly, softly, sneaking up on us like burglars in the night. Rising inflation, weak job growth, a tepid recovery, and the increasing pain that comes with servicing the debt boom of the past generation all conspire to make the foreseeable future challenging.

None of these problems will change very much over any given period. Nor will the associated fallout appear materially worse from month to month or even quarter to quarter. That raises the possibility that the dangers will be ignored or underestimated, which in turn suggests that the crowd may adopt a degree of optimism that’s unwarranted.

But the chickens are coming home to roost, one seemingly inconspicuous and unthreatening data point at a time. Still, there's a danger in becoming too pessimistic as well. The excess will be worked off and progress will come. But it won't be quick or easy this time. And for some with limited patience, it'll be far too slow. Regardless, the future can't be rushed. That's always true, of course, although in the months and quarters ahead this truism will resonate on a deeper level than we've witnessed in many a moon.

This post has been republished from James Picerno's blog, The Capital Spectator.

Mortgage Delinquencies Reach Frightening New Record

One area of the economy that isn't improving is foreclosures which are not expected to peak until 2011 by some estimates. More bad news is that delinquencies have reached a new record with nearly 10% of home mortgages behind by at least one payment. See the following post from Expected Returns.

As I've expected for months now, 'green shoots' are wilting before our very eyes. I've never heard of a recovery characterized by rising unemployment, record foreclosures, collapsing consumer credit, and falling consumer confidence, but hey, maybe we're in a new paradigm. From the New York Times, U.S. mortgage delinquencies reach a record high:

Nearly one in 10 homeowners with mortgages were at least one payment behind in the third quarter, the Mortgage Bankers Association said Thursday.

That is the highest figure since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.

“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said on a conference call with reporters. Five million more unemployed people over the last year has turned into about two million more overdue loans, he added.

This is what I mean when I say unemployment is a leading indicator for this particular downturn. You just can't compare this recession with previous recessions when this crisis was preceded by parabolic rises in housing prices and household debt levels. This is a debt crisis pure and simple. Debt crises, especially one of our magnitude, do not disappear after 2 years.

The association’s delinquency numbers do not include those who are actually in foreclosure, a figure that also rose sharply, to 4.47 percent of all loans. A year ago, it was 2.97 percent.

It also indicates that foreclosures, instead of peaking with the unemployment rate next year, will be a lagging indicator. The association expects foreclosures to peak in 2011.

The data indicate that borrowers in trouble are no longer just those who took out subprime loans. High-quality prime fixed-rate mortgages now represent the largest share of new foreclosures.

If everyone agrees that the sky was falling last year, and that we were on the brink of another "Great Depression", what do you call it when foreclosures are up 50% from those "depression" levels? In the lexicon of our leaders, it is called economic recovery.

I've mentioned previously that the next threat to residential housing is in the higher-end markets. There is another wave of delinquencies set to hit the market in 2010, and if the Fed loses control over interest rates, look out below. Here is a chart of the coming Option ARM and Prime resets in 2010 and beyond. Get ready for fireworks.


This post has been republished from Moses Kim's blog, Expected Returns.

Obama Changes His Tune On Deficit

After campaigning for and signing into effect more than $800 billion in federal stimulus, President Obama now is worried that too much debt could create a double-dip recession and recently spoke out against deficit spending. Although the federal stimulus package delivered limited and underwhelming job growth results, Democrats in Congress are already at work on a second package targeted at spurring job growth – one that will likely result in more deficit spending. See the following from The Street.

President Obama, the champion of stimulus spending, is suddenly worried about an overload of government debt.

After pressing Congress to approve an $800 billion package of infrastructure projects, unemployment benefits and tax cuts during his first month in office, Obama is now warning that too much debt could cause a double-dip recession.

Even more intriguing about this shift in rhetoric is that he chose to deliver the new message to Fox News, News Corp. (NWS Quote) network with which Obama has been feuding over a perceived conservative bias.

One can only assume that the detente with Fox and the decision to talk about debt issues is a politically calculated move to assuage Republicans who have been making deficit spending a centerpiece of their resistance to Obama's many initiatives, in particular health care reform.

Obama also acknowledged that he's in a precarious position in terms of boosting job creation to keep the recovery going while reinstating some fiscal discipline.

In the same interview with Fox, Obama talked about the need for new measures to spur companies to create jobs. Obama's Democratic Party chiefs in Congress are in fact working on new legislation they hope will bring down the unemployment rate from the staggering 10.2% level. Any government-sponsored initiatives along those lines will add to the deficit one way or another.

It's essentially an admission of failure that Democrats are now working on a second job-creation package.

So far, the stimulus spending isn't showing great results. At the end of October, the Obama administration released a report showing that about 650,000 jobs had been saved or created at a cost of $150 billion. That's about $230,000 per job.

I'm not knocking Obama or the Democrats for trying to stoke the economic recovery, for the trillions of dollars spent to bailout the financial industry or for realizing that they may need to do more to help the 15 million unemployed Americans find new jobs.

It's just the idea that Obama is now critical of deficit spending that I find so ironic.

This post has been republished from The Street, an investment news and analysis site.

Obama Wrong About Deficits Causing A Double-Dip Recession

Mark Thoma discusses why Obama is wrong about the deficit causing a double-dip recession. While he may be trying to reassure China about their US dollar concerns, a premature attempt to balance the budget before the economy is fully recovered is more likely to lead to a second recession. See the following post from Economist's View.

Edward Harrison catches this quote from Obama:

The president is in Beijing as part of his tour through several Asian countries to address economic challenges. He spoke candidly about the precarious balancing act his administration is trying to perform. He wants to spend money to kick-start the economy, but at the same time is in danger of creating too much red ink.

Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate.

"There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett.

"I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular.

Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession).

These comments also make it sound like any jobs program, if we get one at all, will be limited to (right-wing approved) tax cuts which is, in my opinion, inferior to direct job creation strategies. Tax cuts can be part of the mix, but by themselves are unlikely to do enough to solve the employment problem.

This post has been republished from Mark Thoma's blog, Economist's View.

Why Gold Bubble Advocates Could Be Wrong

Gold has risen to an unprecedented $1140, causing some to conclude the market is a bubble about to burst. Moses Kim makes a case for resisting the urge to short gold as political tensions, particularly class conflict and concerns over taxation, will cause instability, volatility, and an increased demand for the security offered by gold. See the following post from Expected Returns.

That is, if you want to survive as a trader. Anyone who has been trading actively for a reasonable period of time knows that gold and silver move to their own unique rhythm, and that shorting gold over the past decade has been a losing proposition. I know there are many investors "dollar cost averaging" their short positions in gold, praying for a correction that never comes. The formula for making money in this bull market is simple: buy the dips and sell the rips.

I am amazed at the total change in sentiment from investors towards the gold market. Just watch how investors react to any pullback in gold; my guess is that all dips will be bought aggressively. The pattern over the course of this bull market has been clear: a multi-month consolidation followed by a huge breakout. We haven't come close to going parabolic yet, and until we do, this bull market is well intact and is not at bubble levels. Keep your television tuned in to CNBC so you can do exactly the opposite of what they are recommending. Currently CNBC is telling you to sell gold because it is a clear bubble- this means you should be buying.

Anyway, what is $1140 gold telling us? I'll try to give you an idea of my thought process when I invest, which is heavily dependent on politics.

Political and Economic Dislocations Ahead

If you study history, you realize that the majority of truly seminal events happen in the shortest span of time. While most people are stuck in the mindset that events move in a predictable, steady, linear manner, what's actually happening right now politically, economically, and socially are huge changes that will affect the lives of everyone globally. Political tensions will likely escalate in the coming years, and there will be a sudden change in global dynamics. The catalysts for major events will only be obvious to most people in hindsight. The job of the successful investor, however, is to understand how current actions dynamically influence future events. This allows you to foresee events and to adjust investment decisions accordingly.

Class Warfare, Increased Taxation= Recipe for Disaster

It's not surprising, but class warfare is already beginning in America, as politicians try to enforce equality on the population. If your company can't compete globally, don't worry, Uncle Sam will be there to take capital away from productive individuals and funnel it to unproductive companies. State taxes are already rising for the "rich", and as a result, capital will flow out of the U.S. More than people realize, capital flows have an enormous effect on the growth of economies. Further, as unemployment benefits get extended once again, jobs remain scarce, and "too big to fail" becomes the official mantra of government, we are developing an economic model that is more socialist than capitalist. We will learn once again that enforced equality is contrary to the idea of freedom, both economic and political, and that economic growth will suffer as a result. Why is this important as an investor?

Likely Government Responses to Insolvency

Lets look at the range of possible actions the U.S. government will undertake to stay solvent and delay the inevitable path to bankruptcy. If I were a greedy politician, where would I look to confiscate wealth? Besides gold, which acts as a check against government ineptitude, I would be looking at 401k's. Just look at what the government has done with the Social Security "Trust Fund"? It has replaced money taxed from the population and replaced it with worthless government IOU's. I wouldn't be surprised in the least if 401k's were replaced with U.S. Treasuries, all in the name of stabilizing portfolios. Of course this will be a smokescreen for criminal confiscation of the hard-earned wealth of Americans, but what about the handling of this crisis hasn't been criminal under the surface? The point of my little rant is this: eliminate counterparty risk, especially if you are approaching retirement. If you own a 401k, you are a sitting duck in my opinion.

What's the other option? Inflation. This form of confiscation is obviously much harder to escape. Most lower and middle class Americans will understand the curious feeling that standards of living are going down even in the midst of supposed growth in our economy. The idea that our government would purposely manipulate economic statistics to further their agenda is, surprisingly, repugnant to some people. The truth is, government statistics misrepresent the true state of our economy, which should be obvious to anyone who actually thinks. Why do we need such tremendous stimulus if our economy is recovering? Use your common sense and don't buy into flawed Keynesian propaganda.

My point is that in a time of total disregard for the rule of law and an ad hoc approach to administering justice, the free market just can not operate. This is incredibly bearish for our economy. Why do you think so much money is flowing to gold? You never know when the government will do something truly nutty like ban short-selling or impose ridiculous taxes on capital gains. People are buying equities in the short term, but I don't think anyone in their right mind believes equities are undervalued. Everyone has two hands on the exit.

What is Gold Telling Us?

A move to $1500-$2000 gold, especially in the next year, is a frightening possibility. Don't expect business as usual with gold at those valuations. I have repeatedly stated that gold is a purveyor of truth in a time of lies. You have heard our government officials talk about a "strong dollar policy" for years and years, yet the dollar has lost about 50% of its value in the past decade against a basket of global currencies. The dollar's performance against gold is even worse. At what point does this relatively controlled decline in the dollar become chaotic? I can assure you that smart money is stealthily moving out of the dollar and into gold. When there is mass recognition that the dollar is going way down, good luck trying to head for the exit.

Like it or not, we are approaching a time of volatility both economically and socially. Gold is the only true hedge against instability. The coming volatility is already embedded in the system, whether it is in the form of complex derivatives, insane debt levels, unprecedented unemployment statistics, or a fundamentally flawed global currency arrangement. Be sensitive to the message gold is relaying right now- the worst is definitely not behind us.

This post has been republished from Moses Kim's blog, Expected Returns.

Rebalancing The US China Economic Relationship

According to Robert Reich, Barack Obama's plan to rebalance the economic relationship between China and the US is destined to fail due to China's economic policies designed to maintain order. While the productive capacity of China continues to grow, just 35% of the economy is attributed to personal consumption, down from 50% a decade ago. See the following post from Economist's View.

Robert Reich says China won't be abandoning its currency policy anytime soon:

China and the American Jobs Machine, by Robert Reich, Commentary, WSJ: President Barack Obama says he wants to "rebalance" the economic relationship between China and the U.S. as part of his plan to restart the American jobs machine. "We cannot go back," he said in September, "to an era where the Chinese . . . just are selling everything to us, we're taking out a bunch of credit-card debt or home equity loans, but we're not selling anything to them." He hopes that hundreds of millions of Chinese consumers will make up for the inability of American consumers to return to debt-binge spending.

This is wishful thinking. True, the Chinese market is huge and growing fast. ... But in fact China is heading in the opposite direction of "rebalancing." Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35% of the Chinese economy; 10 years ago consumption was almost 50%. Capital investment, by contrast, rose to 44% from 35% over the decade. ...

Chinese companies are plowing their rising profits back into more productive capacity—additional factories, more equipment, new technologies. China's massive $600 billion stimulus package has been directed at further enlarging China's productive capacity... So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the U.S. and Europe. ...

The Chinese government also wants to create more jobs in China, and it will continue to rely on exports. Each year, tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work. If they don't find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China's governing elite. That elite would much rather create export jobs, even at the cost of subsidizing foreign buyers, than allow the yuan to rise and thereby risk job shortages at home.

To this extent, China's export policy is really a social policy, designed to maintain order. Despite the Obama administration's entreaties, China will continue to peg the yuan to the dollar... This is costly to China, of course, but for the purposes of industrial and social policy, China figures the cost is worth it. ...

While China's currency policy is certainly a worthy topic for discussion, lately we are spending a lot of time pointing our fingers at others and blaming them for our problems rather than engaging in the more difficult task of getting our own house in order. I'm not saying that we should ignore things that unfairly disadvantage us, whatever those might be, just that a continued focus on external factors provides a convenient excuse to avoid going through the difficult changes needed to reform our own economy, an excuse that can be exploited by powerful interest groups opposed to needed change (though Reich at least touches on the US side of the equation in a part I left out).

Yes, China needs to change its currency policy, and the fact that it won't or can't change will probably lead to further economic imbalances, perhaps to dangerous levels, and cause increased political tension in the future. But I hope we don't allow the financial industry and others wishing to deflect blame for the crisis and avoid stricter regulation to use the controversy over China's currency policy to divert our attention elsewhere and alter the narrative about how we got into this mess.

This post has been republished from Mark Thoma's blog, Economist's View.

When The Federal Reserve Gets It Wrong

While often criticized as ignorant and misguided, central bankers make decisions that they deem as the best for their country using the facts and information that they have available to them at the time. Setting monetary policy is a high-stakes, high-skill game played by fallible humans, and flawed decisions have led to major consequences throughout history. See the following post from The Capital Spectator.

Central bankers are a powerful lot and so it’s an easy to assume that they’re also prescient. When you’re making decisions that affect the livelihoods of millions of people—billions on a global scale—confusing people with their institutional authority can become habit forming. But central bankers are mortal, and therefore prone to mortal decisions, a.k.a. flawed decisions. Heck, it happens to the best of us at times. The only difference is that most people’s day jobs don’t cast a long shadow over a nation’s money supply.

No less an expert on central banking than Paul Volcker, the patron saint of inflation slayers everywhere, advises that “central bankers suffer from hubris like everybody else.” That’s not surprising, but it does have consequences.

The monetary policy du jour, as a result, may not be exactly what the macroeconomic gods ordered. A mismatch between the optimal monetary policy and current events is in some sense fate. Working with limited information makes it hard to know if today’s actions will suffice for the uncertainty that arrives tomorrow. As a result, we can talk of monetary policy in terms of its degree of inaccuracy or accuracy.

Intelligently dispensed or not, monetary policy steers economic activity, ranging from decisions in asset pricing to lending preferences to choices that affect the labor market. Alas, poor decisions have a habit of delivering less-than-satisfying results.

Remember all the talk of the Great Moderation? “One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility,” Ben Bernanke pronounced in early 2004 in his then-current position as a Fed governor. “Reduced macroeconomic volatility,” he went on to explain, “has numerous benefits. Lower volatility of inflation improves market functioning, makes economic planning easier, and reduces the resources devoted to hedging inflation risks. Lower volatility of output tends to imply more stable employment and a reduction in the extent of economic uncertainty confronting households and firms. The reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe.”

It’s debatable how much the Fed was influenced by the past for setting monetary policy in 2004 and beyond, but some observers of central banking suggest that the calm history in those halcyon days led policymakers astray. Anna Schwartz of the National Bureau of Economic Research speaks for many dismal scientists when she charges in a recent essay that the Fed kept interest rates too low for too long earlier in this decade. In turn, the inappropriate interest rates distorted markets, she says, and the fallout wasn't trivial. “In the case of the housing price boom, the government played a role in stimulating demand for houses by proselytizing the benefits of home ownership for the well-being of individuals and families.” The net result, to state the obvious, was less than optimal.

Volcker has commented that the preference for low interest rates earlier in this decade was based on a “misreading of the Japan situation.” The worry that deflation threatened in 2001-2005 was simply wrong, as was the resulting prescription: low interest rates.

Economist Scott Sumner opines that another Fed mistake of some consequence was the decision in September 2008 to leave interest rates as is. “On September 16, 2008, the Fed made one of its most costly errors ever,” he recently wrote. “Immediately after the failure of Lehman Brothers, the FOMC decided to leave the target rate unchanged at 2.0 percent.” Monetary policy, in other words, should have been far more supportive given current events. It wouldn’t have prevented the financial crisis, but it might have minimized the fallout, perhaps by more than a trivial amount.

The idea that central banks have power of the ebb and flow of economies isn’t new. In 1963, Milton Friedman and Anna Schwartz reordered perceptions of the Great Depression with their the monumental A Monetary History of the United States, 1867-1960, which indicts the central bank’s monetary policy for the events of the 1930s. Friedman and Schwartz argued that the central bank’s errors in managing the money supply were the primary catalyst that turned recession into something far worse. “Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the [economic] contraction’s severity and almost as certainly its duration,” they wrote.

Today, central bankers the world over are faced with another decision of above-average consequence. The exit strategy, as it’s called, requires that the Fed and its counterparts choose when to begin drawing back the enormous liquidity that’s been injected into the global economy.

“It is clear…that our exceptional support cannot last for too long a period of time since there are negative side effects,” Jürgen Stark, a member of the European Central Bank’s executive board, said last week. Jan F Qvigstad, deputy governor of the Central Bank of Norway, also remarked last week that the country’s current target policy rate of 1.5% “will be 2.75 per cent around the end of next year.”

Some central banks have already begun raising rates, as we noted a month ago. The Fed too must return monetary policy in the U.S. to something approaching a normal state. As always, the possibility of raising rates too early, too late or insufficiently keeps everyone guessing. Accordingly, inflation may or may not be a problem in the years ahead.

“At some point, the economic trends will shift and waiting too long to raise interest rates will be the primary hazard,” we wrote in March. “We don't know if the turning point will come in a few months or a few years, but we shouldn't delude ourselves that it's never coming.”

The risk tied to the timing and magnitude of the exit strategy isn’t necessary limited to inflation, as the tumultuous history of this decade reminds. We might add that we also shouldn’t kid ourselves that the Fed will make exactly the right decisions at exactly the right time.

There are many advantages to fiat money. But the main advantage is also the primary risk: flexibility. As with democracy and investing, choices matter. Rarely are those choices perfect. Sometimes they’re egregiously wrong, sometimes they’re more or less productive. The great question is what outcome will the decisions give us this time?

This post has been republished from James Picerno's blog, The Capital Spectator.

Central Banks Have Become Net Sellers Of Gold

Following the huge purchase of gold by the central bank of India, the two decade long trend of central banks as net sellers of gold seems to have been reversed. There seems to be a growing unease surrounding the US dollar, although a dollar rebound could quickly put a halt to the bullish gold market. See the following post from The Mess That Greenspan Made.

A week removed from the blockbuster announcement that the Reserve Bank of India had purchased 200 tonnes of gold from the IMF, precious metals continued their ascent, gold making fresh all-time highs last week at just over $1,120 before ending the week with a gain of about $20 at $1,118 an ounce. Silver posted a modest gain, up from $17.39 an ounce to $17.42 an ounce.

The view that central banks will continue to be net buyers of gold rather than net sellers (as has been the case for about the last twenty years) has many calling the Indian purchase at $1,045 an ounce the "new floor" for the gold price.

That would certainly seem to make sense at least for the near-term as market analysts speculate on which central bank might be next to buy IMF gold while hearing the U.S. Federal Reserve and international G20 representatives stress that it is far too early to begin removing the massive liquidity and stimulus that have seemingly rescued the world from another Great Depression.

The recent rise in the gold price has obviously been aided by a weakening U.S. dollar but, with unemployment set to go even higher over the next six months, there is little reason to think that the Fed will do anything to bolster the currency during that time.

Rumors swirled last week that the Reserve Bank of India may have sold U.S. Treasuries to fund its recent gold purchase and there is growing unease amongst countries that maintain dollar "pegs" for their currencies as they have to print more of their own currency to buy dollars and maintain that peg.

As for silver, it is interesting to note that inventory at the iShares Silver Trust ETF (NYSEArca:SLV) continues to rise, surging in recent days to a new all-time high with the addition of 200+ tonnes as shown below.



Meanwhile, inventory at the world's most popular gold ETF, SPDR Gold Shares ETF (NYSEArca:GLD), remains below levels seen at mid-year.

It should be an interesting period ahead for both gold and silver since, going back to very early in the decade, there has been a repeating two-year pattern for the metals that can been seen in the gold chart below. Since 2002, prices have peaked at new highs early in the even numbered years - in 2004 at $425, in 2006 at $725, and, most recently, in 2008 at $1,035.

In many ways, recent events are shaping up to be a repeat of this pattern which, based on the previous peak-to-peak gains would imply a gold price somewhere north of $1,300 early next year.


Of course, any sharp rebound in the dollar (which some are still loudly predicting) would reverse this trend very quickly.

There were some truly odd goings on in Vietnam over the last week or so that, for those who pay attention to this sort of thing, really adds to the case for a much higher gold price, perhaps sooner rather than later. After seeing a surge in buying in gold bullion in recent years, particularly after inflation soared to nearly 20 percent in early-2008 and investors looked to preserve their wealth, the government banned imports of the metal.

Gold continues to be traded in the country, however, due to the limited supply, it has developed its own local market that, last week, saw bullion trading at about $60 higher than in global markets. After markets went "crazy" (see this account in Vietnam.net), the government announced that it would resume imports of the metal and premiums are now reverting quickly to more normal levels.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Most Expensive Real Estate In The World

Overseas Property Mall listed the top 10 most expensive streets in the world, that cost at least $28,000 for each square meter. Despite the astronomical prices, the most expensive real estate actually outperformed most markets, declining only 12% last year. See the following from Overseas Property Mall.

If you’ve recently found a little cash down the back of the sofa and you’re in a property-buying mood, you may like to take a look at the following streets around the world. Although prices on these most expensive streets fell in overall value by 12% last year, that’s still better than the 20% to 30% experienced in the mainstream market. Europe was less hard hit than the US.

1. Avenue Princesse Grace, Monaco, $120,000 per sq/m

The most expensive street in the world, where prices last year were actually $190,000 per sq/m. There could be a few who made the plunge last year with a little buyer’s remorse right now. A 334 sq/m four-bedroom penthouse here will set you back US$50.

2. Chemin de Saint-Hospice, Cap Ferrat, South of France, $100,000 per sq/m

Ah, that’s more like it, much more affordable. Less than thirty miles away Avenue Princesse Grace, with just fifteen houses with Mediterranean views. Just one for sale at the moment at an undisclosed price. But as they say: if you need to ask the price, you can’t afford it.

3. Fifth Avenue, New York, $72,000 per sq/m

A 400 sq/m apartment with terraces overlooking Central Park sold for $29m in June. Many residents are staying put until prices come back up. I don’t blame them. $29 million? Chickenfeed.

4. Kensington Palace Gardens, London, $65,000 per sq/m

Prices on KPG, as those in the know call it, have fallen 15% to 20% recently. A private road that abuts Kensington Palace, with several embassies in residence. You’d need to own a country to buy there.

5. Avenue Montaigne, Paris, $54,000 per sq/m

We’re almost slumming it at these prices. This street includes the Élysée Palace, official residence of someone called the President of France. The strong euro and views of the President’s wife have kept prices higher here than some other places.

6. Via Suvretta, St Moritz, Switzerland, $45,000 per sq/m

Prices rose this year by 18%. Yes, rose. That’s rich people trying to take advantage of Switzerland’s low taxes as other countries put theirs up. Geneva and Zurich are also experiencing a boom.

7. Via Romazzino, Porto Cervo, Sardinia, $42,000 per sq/m

Italy’s most expensive street, popular with Russian billionaires, one of whom has apparently bought eight houses there. Everyone needs at least eight houses.

8. Severn Road, The Peak, Hong Kong, $40,000 per sq/m

Down from the number two spot last year, when prices were $121,000 per sq/m. I don’t care how rich you are, that’s going to hurt.

9. Ostozhenka Street, Moscow, $35,000 per sq/m

Russia’s wealthiest have apartments on Ostozhenka, which makes up part of the city’s “Golden Mile”. Free furry hat with each purchase.

10. Wolseley Road, Point Piper, Australia, $28,000 per sq/m

Prices have strayed constant due to the comparatively strong Australian economy and currency.

This post has been republished from Overseas Property Mall.

The Trouble With The Government-Owned Mortgage Market

Not a lot of attention has been paid to the government buying a trillion and a half dollars in mortgage related debt, although they have essentially bought most of the mortgage market. Tim Iacono discusses why there should be a greater concern about the government buying so much debt with newly printed money. See the following post from The Mess That Greenspan Made.

In reading the newspapers over the last eight months, since the Federal Reserve decided to print money on a massive scale in order to buy $300 billion in U.S. Treasuries along with about a trillion and a half dollars in mortgage related debt, these two groups of purchases have been viewed quite differently.

The former is seen as a particularly bad thing for a central bank to be doing as this money created "out of thin air" is used to directly fund government spending, spurring comparisons to Zimbabwe and Weimar Germany where similar efforts led to hyper-inflation.

However, the latter is viewed as something of a benign undertaking (by comparison, at least), widely perceived as providing needed support for housing in the U.S. by creating a market for housing debt that might not otherwise exist.

After all, would you buy 2003-2008 vintage mortgages that have been "securitized" by Wall Street firms or one of the two wards of the state - Fannie Mae and Freddie Mac - if the Fed wasn't buying the stuff too?

I wouldn't.

Is there really that big of a difference between these two?

Since the U.S. government and their "too big to fail" banking friends now essentially own the entire domestic mortgage market (causing understandable confusion as to which way the arrow would be pointing on a hypothetical org chart that included the U.S. government and "quasi-government" organizations like Citibank and Bank of America) is there really that much of a distinction between U.S. debt and U.S. housing debt?

By buying all this stuff, isn't the central bank effectively monetizing the housing debt?

And shouldn't a lot more people (particularly in China and Japan) be concerned?

As shown below in the now familiar depiction of the Federal Reserve's balance sheet, since the financial crisis has ebbed and banks are able to pay back some of the money they had to borrow when it looked like the entire world was going to implode, the only items that continue to grow are U.S. Treasuries, mortgage-backed securities (MBSes), and agency debt in the form of loans to Fannie and Freddie.



Clearly, there are big differences between U.S. debt and these two forms of housing debt.

For example, when the government sells Treasuries to the central bank in exchange for newly printed money, it does so with the tacit understanding that the money will never have to be paid back.

But, when the Fed does the same thing in exchange for Fannie and Freddie bonds, then...

Well, actually, these two appear to be one and the same. The GSEs are fundamentally bankrupt, a characterization that, save for its ability to borrow and print money, applies to the U.S. government as well, and there would seem to be little chance of all the GSE bonds owned by the Fed being redeemed at full value unless the government steps in with borrowed money or, in the oddest of all circuitous monetary routes, with money it received from the central bank itself.

However, there is a distinction between U.S. debt and mortgage backed securities. In the case of the latter, newly created money is paid to whoever used to own the securitized loan - Fannie, Freddie, Citibank, Bank of America, etc. - and then, in theory at least, the central bank sees returns based on homeowners making their mortgage payments.

The only thing is, more and more homeowners are no longer able to make their payments and, as a result, the value of these securities would have tumbled to unknown depths if not for the central bank coming to the rescue and paying what others won't.

What is the true value of these mortgage backed securities?

In theory, we'll find out early next year when the Fed stops buying them, but, like the homebuyer tax credit, don't be surprised if this wildly popular program is extended, perhaps indefinitely as waves of foreclosures come ashore in 2010 and 2011.

Perhaps it would help to consider the similarities between the Fed using its printing press to buy Treasuries and to buy MBSes.

On the one hand, you have a government that got itself into a jam by spending more money than it could bring in or borrow at low interest rates, so the central bank had to print up money to make up the difference, trading newly created U.S. dollars for U.S. Treasuries.

On the other hand, you have a housing market that got itself into a jam, enabled by the 30-year government drive for higher rates of homeownership which was financed by the government sponsored owned mortgage giants and banks now deemed too big to fail, all of this culminating in one more in a long series of bursting asset bubbles that appears to be business as usual in recent decades for the U.S. economy.

That the Federal Reserve has to print money "out of thin air" to buy $1 trillion or so of this souring mortgage debt shouldn't come as too big of a surprise.

In both cases it's a matter of throwing good money after bad, the odds of the Federal Reserve getting anywhere near what it paid for these MBSes (if and when it ever goes to sell them) being about as good as the odds of the U.S. government running a sufficient surplus to pay back any of the $300 billion that was given to it by the central bank.

The system wasn't set up to work this way.

If the founding fathers knew that we had created yet another central bank and, not only was it printing up money to fund government spending but it was buying up home loans, they'd roll over in their graves (except maybe for Alexander Hamilton).

Since its founding almost a hundred years ago, the central bank has, for the most part, done its job simply by buying and selling treasuries, a fact that is clear to see in recent data below.



But, over the last year or so, there's been a radical change in what the central bank buys with money it creates with a simple keystroke and, now that housing and government activities have been so intertwined, is there any real difference between the U.S. government's finances and the finances of the nation's housing market.

It's one thing to step in and provide support for commercial paper markets and money markets, but it's quite another to step in and support the housing market that is now almost wholly owned by the U.S. government in one way or another.

You don't just "unwind" this kind of support.

Of course, if home prices zoom back to their 2005-2006 highs, it's quite possible that the GSEs will spring back to life despite being in the hole by over $100 billion with the red ink still flowing freely. In this case, the Fed could probably sell all its MBSes back into the market and all would be square.

But, that seems about as likely as the U.S. government running a surplus.

If the mortgage backed securities do get sold back into the market in the coming years at anywhere near the price the Fed paid, then all we'll have succeeded in doing is re-inflating the housing bubble, which, come to think of it, is probably the current plan.

But, more likely than not, all this new money that has and will continue to be conjured into existence to buy bad assets - be they U.S. treasuries, bonds issued by Fannie and Freddie, or home loans made against overpriced houses - will all just make the rest of the U.S. money currently in existence less valuable simply because there is more of it.

Maybe a lot less valuable.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.