Double Dip Drumbeats

Whigs

In an exclusive interview with  ET Now, Robert Shiller  , Professor, Yale University, talks about the possibility of a double dip in the housing prices. Excerpts:

Housing prices did show a rebounce from crisis lows, but the tax incentives have expired and foreclosures are increasing. Are you worried that numbers can go down even further?

I am definitely worried about that. Our latest survey shows that most forecasters are expecting a down market for 2010, but then increases after that up to 2014.. But among all these forecasters, the difference of opinion is enormous. I think we are at a time when nobody knows. The average opinion is that home prices would a little bit more than keep up with inflation for the next four years, but the average opinion is not very secured.

So is there a chance of a double dip here?

There is definitely a chance of a double dip in home prices. I would say it in a different term that the recovery that we saw in the United States since early 2009 which peaked in the fall of 2009 just was due to these incentives that the government created and is just a temporary interruption of a downward trend. That is a possibility that we cannot discount.

I would like to continue on the tax credits other than giving relatively small number of people like tax benefits. What has been the real value of this home tax credits?

The problem is that the balance sheets of banks and other financial institutions are so much underwater that the government had to come in and bail them out and we well know that these securitize mortgages are vulnerable to further price drops. So it throws a wrench in the world's financial system and repercussions seem everywhere that the central banks, the governments of the world did not want to let that happen because they fear that it really would have brought on a great depression.

So what needs to happen for the US housing numbers to show boost?

There are so many things that might cause it to go up. Notably there could be more government support. In the United States, we have Fannie Mae and Freddie Mac who were continuing to look weaker and weaker. They are under government, that is one thing and the agenda for the next year is to figure out what we do with them. Nobody knows yet the government could decide to give them another boost and a bigger subsidy and tell them to go back in their action and that would certainly restore confidence in the market and bring it up. We just do not know if the government will do that.

So the next data will come out next Tuesday. Can you try to give us a forecast of what you expect?

Well, I don’t forecast our own indexes, but I think that the S&P Case-Shiller index what I think to know is they have declined for 6 months in a row now. If we were talking about a double dip, you could say we are already in a double dip.

Whigs

Whitney Says She Sees ‘Double Dip’ in Housing Market

The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves, analyst Meredith Whitney said.

“Most investors are not baking in a double-dip in housing,” Whitney, founder of New York-based Meredith Whitney Advisory Group, said today in an interview on CNBC. “You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.”

U.S. home prices fell more than 30 percent from their peak in 2006 through the first quarter of 2009, prompting banks to take writedowns on mortgage loans. Housing starts have increased 24 percent since the low in April 2009 as mortgage rates remained near record lows and the U.S. government offered tax credits to homebuyers.

Whitney said she didn’t foresee the trend of some homeowners paying off credit cards and other debt instead of making mortgage payments, as they await better terms on mortgage modification programs.

Job cuts by state and local governments will also contribute to a “rough second half” for the U.S. economy, she said.

Financial reform will slow the velocity of money and cause “de-banking” as more Americans lose access to some banking services, making it “more expensive to be poor in this country,” Whitney said.

Whigs

Double-dip drama
Feeble figures fuel fears

Jun 24th 2010 | Washington, dc

MORE than the European debt crisis is keeping American economic policymakers awake at night just now. Despite a year of government effort, a tentative recovery in the housing market appears to be on the verge of stalling.

Home prices have now fallen for the past six months, according to the Case-Shiller home-price index, after rising from their nadir for the five months before that. (Another index, from the Federal Housing Finance Agency, has, however, shown a slight uptick in March and April.) As for sales volumes, last September home sales soared in anticipation of the planned expiry of a government housing-tax credit, only to tumble thereafter, despite the extension of the deadline to April this year. As the new deadline approached sales duly climbed again. But the latest data show that even before the credit window closed, fewer sales were going through (see chart). Sales of new homes fell 33% from April to May, nearly the worst performance since the bust began.

It is not as if the government has not tried. After the housing crash, millions of homeowners—a full quarter of those with mortgages—had loans larger than the value of their homes. Barack Obama hoped to prevent defaults with a plan designed to encourage banks to refinance the mortgages of those unable to pay. On the demand side, the Federal Reserve held down mortgage rates by buying up mortgage-backed securities, while Congress offered a generous tax credit to qualifying buyers.

These programmes have not worked as well as had been hoped. Affordability is no longer the driving factor behind foreclosures; borrowers who took on more debt than they could handle defaulted on their loans long ago. Instead, the problem is negative equity. A borrower deeply underwater on his mortgage may have no choice but to default if he loses his job, since a sale would entail a huge loss. And a growing number of underwater borrowers are opting simply to walk away from mortgages that they can in fact afford.

Banks are balking at rewriting mortgages, despite incentives to do so. Too often borrowers default later on. The latest data on the government’s programme show that 400,000 loans have been renegotiated—far less than the goal of 3m-4m. Neither have government incentives to buy houses helped much. Credits may have done little more than move sales around.

The steady drumbeat of foreclosures has continued; they have been running at a rate of over 300,000 filings a month for the past 15 months. By some estimates, it will take more than eight years of normal sales to clear the stock of houses now held by banks. This overhang holds down prices, meaning that the road out of negative equity is a long one.

Yet policy failures can be blamed only so much. A new report from Harvard University’s Joint Centre for Housing Studies notes that, historically, sustained housing recoveries are far more dependent on job growth than on factors like the level of interest rates. So May’s disappointing jobs figures, showing that the private sector added just 41,000 workers, was doubly bad news. With nearly 15m Americans still out of work, a real turnaround could be a long time coming.

Whigs

Many Americans know that the Great Depression was started by the bursting of
the giant Wall Street bubble of the 1920's (fueled by the use of bank
deposits on speculative gambling, which is why Glass-Steagall was passed) ,
which in turn caused a run on American banks.

But most Americans don't know that the second leg of the Depression was
caused by European defaults.

The second leg down of the Depression was larger than the first, as shown by
this chart of the Dow:



The second leg down was primarily initiated by the failure of the
Creditanstalt (also spelled Kreditanstalt) bank in Austria. Creditanstalt
declared bankruptcy in May 1931.

A book written by Aurel Schubert, published by Cambridge University Press,
points out that:

"Austria played a prominent role in the worldwide events of 1931 as the
largest bank in Central and Eastern Europe, the Viennese Credit-Anstalt,
collapsed and led Europe into a financial panic that spread to other parts
of the world. The events in Austria were pivotal to the economic
developments of the 1930s ...."

The Great Depression was composed of two separate panics. As you can see
from contemporary accounts ... in 1930 people thought they'd seen the worst
of things.

Unfortunately, the economic conditions created by the first panic were now
eating away at the foundations of financial institutions and governments,
notably the failure of Creditanstalt in Austria.

The Austrian government, mired in its own problems, couldn't forestall
bankruptcy; though the bank was ultimately bought by a Norwegian bank, the
contagion had already spread. To Germany. Which was one of the reasons that
the Nazis came to power. It's also, ultimately, one of the reasons that we
had our second banking crisis , which pushed America to the bottom of the
Great Depression, and brought FDR to power here.

Not that I think we're going to get another Third Reich out of this, or even
another Great Depression. But it means we should be wary of the infamous "
double dip" that a lot of economists have been expecting.

hutong123

double dip

Whigs

Hussman Sounds Recession Bell
John Hussman, fund manager of Hussman Strategic Total Return (HSTRX) and Hussman  Strategic Growth (HSGFX), is amping up his recession warnings, saying that, “based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”

Hussman recently noted that of the four pieces of his recession indicator, the only one not yet signaling a recession was the ISM Purchasing Managers Index, which needs to fall to 54 or lower. The most recent reading, from May, was well above that, at 59.7. But now, Hussman notes in his latest market commentary that the ECRI Weekly Leading Index, which has been a leading indicator for the ISM index, has declined to -6.9%, a bad sign.

Hussman also says that investors shouldn’t base their assumptions on what will happen in the economy and market on historical trends of the past 30 or 40 years, because the credit strains and deleveraging risks the U.S. faces make such comparisons “out of sample.” He says that if you broaden your outlook, however, there are other periods that offer good comparisons, and he says Kenneth Rogoff and Carmen Reinhart’s This Time Is Different highlights many of them. “The book presents lessons from a massive analysis of world economic history, including recent data from industrialized nations, as well as evidence dating to twelfth-century China and medieval Europe,” Hussman says. “Reinhart and Rogoff observe that the outcomes of systemic credit crises have shown an astonishing similarity both across different countries and across different centuries.”

Those outcomes include housing price declines averaging about 6 years, equity price downturns of about 3.4 years, and increasing unemployment for almost 5 years. On average, unemployment rises for almost 5 years. Using the Bear Stearns collapse as a starting point, Hussman writes, “The average adjustment periods following major credit strains would place a stock market low closer to mid-2011, a peak in unemployment near the end of 2012 and a trough in housing perhaps by 2014. Given currently elevated equity valuations, widening credit spreads, deteriorating market internals, and the rapidly increasing risk of fresh economic weakness, there is little in the current data to rule out these extended time frames.”

babyruth

Whigs

cc2265

jilier

我是谁

Whigs

Warning signals of a double-dip recession flash brightly across the world

Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation.
By Ambrose Evans-Pritchard, International Business Editor
Published: 10:53PM BST 29 Jun 2010

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 3pc to 2.96pc.

Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.

Mr Reid said deflation has emerged as the dominant risk in the West and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.

Triple tremors from the banking crisis in Spain, crumbling confidence in the US, and a setback in China’s leading economic indicator all combined with a vengeance on Tuesday. “The market in risky assets has capitulated ­today amid fears that the ­global recovery is petering out,” said Gavan Nolan, head of credit at Markit.

Rumbling in the background are influential voices warning of a global slide into economic quagmire. Nobel Laureate Paul Krugman said premature tightening in much of the North Atlantic region at the same time would lead to ­disaster. “We are now, I fear, in the early stages of a third depression, primarily a failure of policy. Both the United States and Europe are well on their way toward Japan-style deflationary traps. The Fed seems aware of these deflationary risks, but what it proposes to do is, well, nothing,” he wrote.

China’s Shanghai composite index of equities fell 4pc on Tuesday and is now 55pc below its peak in late 2008. The authorities have been tightening this year to slow inflation and curb property speculation as home prices in Shanghai and Beijing reach 13 times incomes, but it is unclear whether they can engineer a soft-landing in an economy where state-owned banks have built up huge hidden debts.

The Baltic Dry Index that measures freight rates for bulk goods – and watched as a proxy for the ups and downs of the Chinese economy – has dropped by 40pc over the past month.

The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that Japan itself may be sliding back into deflationary deep freeze. Japan’s unemployment rose in May for the third straight month to 5.2pc. ­Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Whigs

According to Mr. Hussman, an official recession warning still requires the ISM Purchasing Managers Index to decline to 54 or lower. Though he notes that 1988 was the only time such a low growth rate of the ECRI Weekly Leading Index was not associated with an actual recession.



Those looking for evidence of an upcoming double dip recession may have found their canary.  The Economic Cycle Research Institute’s (ECRI) Weekly Leading Index is pointing to serious trouble ahead for U.S. economy with the index falling seven consecutive weeks moving into negative territory.  According to Laksham Achutan, managing direction of ECRI, “The continuing decline in [the index’s] growth rate to a 56-week low underscores the inevitability of the slowdown.”  Looking at the historical relationship between growth and the ECRI’s index, Laksham’s views may not be unfounded.  Over the past several years the index has done a fairly robust job at predicting turns in the U.S. economy, and if you believe the current trend things are about to get much worse.  Unlike the Conference Board’s Leading Economic Indicator Index the ECRI’s Weekly Leading Index is timelier released on a weekly basis with only a one week lag.   The next release will be this coming Friday.