The other day I was chatting with an acquaintance who is also looking to buy their first home. And their assessment was that the home prices would begin to go up around next summer. All I wanted to say to them is that they are naive. I doubt the housing market will turn around until 2011-2012. It though will stabilize far sooner than that. But "stabilize" only means stop going down and not increase.
And one would ask why? The reason is that the basic underlying fundamentals are not in place and will not be in place for a long time. And these fundamentals include positive growth in economy and job market. There is nothing to sustain increasing housing prices.
In the meantime, some economists are asking why this recovery would be any different from the past recessions. Well, I have only two words for them - China and India. During the past recessions, US did not have any serious competition - for both skills and resources - from any other similar-sized nation in the world. But both India and China have cheaper costs and higher skilled labor market. Sustainable recovery may occur but may not positively affect American people.
Showing posts with label The Economy. Show all posts
Showing posts with label The Economy. Show all posts
Sunday, August 30, 2009
Thursday, August 20, 2009
The State of the State
Several incentives have been doled out to jump start the US economy. These include the multi-billion dollar stimulus packages, cash-for-clunkers program and other local stimulus packages. Lot of the stimulus cash has not yet been spent so the impact of this has not worked through the system. But most of these are short-term incentives. These are meant to jump start the US economy with the hope that overall consumer spending (main driver of the economy) will begin working at normal pace before the effect of these short-term stimulus packages run out.
The Federal Reserve has at this point put all of their cards on the table. They do not have any substantial tools left in their hands.
All of these have created smaller shoots of recovery only to be crushed by the larger problem with the economy. These smaller signs of recovery are not leading to sustainable path to recovery. The latest one being just last week, when some numbers implied that things were better. And of course, Wall Street has a tendency to make a trend out of a single data point. Consumer spending should inch up at this time of the year due to back-to-school shopping. But even that does not seem to have materialized.
The chronic problem with the US economy is lack of job creation. The unemployment numbers are substantially underestimating the reality as many people are underemployed and are not counted in the numbers. At the same time, these consumers have lost a substantial chunk of their retirement savings and home values. And so the vicious circle continues.
Any expectation of either China, India or any other nation pulling us out of this recession will not materialize. The principle reason here is that they just do not have the purchasing power needed to not only pull out their respective economies from doldrums but also help the US. Unless of course the US Dollar falls so low as to substantially increase their purchasing power. But such a dramatic fall in the US Dollar would mean substantial and permanent contraction in the US economy and that would be disastrous.
The Federal Reserve has at this point put all of their cards on the table. They do not have any substantial tools left in their hands.
All of these have created smaller shoots of recovery only to be crushed by the larger problem with the economy. These smaller signs of recovery are not leading to sustainable path to recovery. The latest one being just last week, when some numbers implied that things were better. And of course, Wall Street has a tendency to make a trend out of a single data point. Consumer spending should inch up at this time of the year due to back-to-school shopping. But even that does not seem to have materialized.
The chronic problem with the US economy is lack of job creation. The unemployment numbers are substantially underestimating the reality as many people are underemployed and are not counted in the numbers. At the same time, these consumers have lost a substantial chunk of their retirement savings and home values. And so the vicious circle continues.
Any expectation of either China, India or any other nation pulling us out of this recession will not materialize. The principle reason here is that they just do not have the purchasing power needed to not only pull out their respective economies from doldrums but also help the US. Unless of course the US Dollar falls so low as to substantially increase their purchasing power. But such a dramatic fall in the US Dollar would mean substantial and permanent contraction in the US economy and that would be disastrous.
Wednesday, July 08, 2009
Green Shoots
The news about green shoots in the economy are now old. And a lot of talk about green shoots may have helped consumer confidence for a few days/weeks. But now the green shoots seem to have withered like the gardens in New England after many weeks of almost non-stop rain.
As I have said earlier (http://smitaworld.blogspot.com/2009/03/what-keeps-me-awake-at-night.html), the first sign of economic pickup is normally an uptick in manufacturing. But here there is a small technical problem.
And that is - since the US has lost substantial manufacturing capacity, it remains to be seen how this manufacturing uptick will transpire. With continuing job losses and our inability to put the stinulus $$$ to productive usage right away, the recovery does not seem as imminent. Shall we see the green shoots of manufacturing uptick in China (and other manufacturing nations) and if so, how that trickles down to benefit US is a big question mark.
Stay tuned...
As I have said earlier (http://smitaworld.blogspot.com/2009/03/what-keeps-me-awake-at-night.html), the first sign of economic pickup is normally an uptick in manufacturing. But here there is a small technical problem.
And that is - since the US has lost substantial manufacturing capacity, it remains to be seen how this manufacturing uptick will transpire. With continuing job losses and our inability to put the stinulus $$$ to productive usage right away, the recovery does not seem as imminent. Shall we see the green shoots of manufacturing uptick in China (and other manufacturing nations) and if so, how that trickles down to benefit US is a big question mark.
Stay tuned...
Saturday, April 04, 2009
The Economy, Afghanistan, G-20, IMF, China, et al
Just a few points about all of the above not necessarily in any specific order.
Well, we continue to hemorrhage jobs. No change there. And of course, this does not include those who have either stopped searching for jobs, are underemployed or working part-time.
G-20 was not much of a win for President Obama. G-20 agreed to contribute over a trillion dollars to IMF. But if past history is any indication, IMF have not really performed (specially in today's world where everything is and should be performance-based). Many of the developing nations whom IMF "helped" in the past, have to some extent as a backlash turned far to the left. I am not sure what is going to change there. It may just mean money down the drain and more corruption. Not only that, IMFs' excessively stringent requirements for austerity have caused great pain and suffering for the people in the nations being "helped".
And of course, this will not be real money. But SDRs. SDRs are akin to printing money without printing money. This means a potential to cause inflation in the receiving country.
And last but not the least, these are promises. How much money will actually be contributed remains to be seen. Only time will tell.
The world (Or the G-19) seem to want business as usual. That means Americans should continue buying and China should continue financing those purchases. Or as a guest was saying on the local NPR station that the Chinese sold America poisonous toys and candies (melamine in milk-based) and America sold China toxic debt and so we are even.
But I think at least from American consumers' standpoint that behavior is history for the time being (and may be a very long time being). It is high time that the US consumers stop buying "stuff" for the sake of buying stuff and provide stimulus for themselves by saving more for the future.
In the meantime, Chinese are concerned that all the stimulus that the US is providing is going to make their trillions worthless. Well, few things to ponder here.
Well, that's all for now. Write to you again soon.
Well, we continue to hemorrhage jobs. No change there. And of course, this does not include those who have either stopped searching for jobs, are underemployed or working part-time.
G-20 was not much of a win for President Obama. G-20 agreed to contribute over a trillion dollars to IMF. But if past history is any indication, IMF have not really performed (specially in today's world where everything is and should be performance-based). Many of the developing nations whom IMF "helped" in the past, have to some extent as a backlash turned far to the left. I am not sure what is going to change there. It may just mean money down the drain and more corruption. Not only that, IMFs' excessively stringent requirements for austerity have caused great pain and suffering for the people in the nations being "helped".
And of course, this will not be real money. But SDRs. SDRs are akin to printing money without printing money. This means a potential to cause inflation in the receiving country.
And last but not the least, these are promises. How much money will actually be contributed remains to be seen. Only time will tell.
The world (Or the G-19) seem to want business as usual. That means Americans should continue buying and China should continue financing those purchases. Or as a guest was saying on the local NPR station that the Chinese sold America poisonous toys and candies (melamine in milk-based) and America sold China toxic debt and so we are even.
But I think at least from American consumers' standpoint that behavior is history for the time being (and may be a very long time being). It is high time that the US consumers stop buying "stuff" for the sake of buying stuff and provide stimulus for themselves by saving more for the future.
In the meantime, Chinese are concerned that all the stimulus that the US is providing is going to make their trillions worthless. Well, few things to ponder here.
- Nobody (including the US) forced China to hold all their reserves in US Dollars. Whatever happened to diversification!!!
- China for many years have artificially kept their currency under-valued so that their exports would be cheaper (aka dumping). This helped the Communist government create jobs for rural billions and prevent them from being restless and agitate for more democratic rights. Now, of course the situation is unraveling.
Well, that's all for now. Write to you again soon.
Sunday, March 22, 2009
What Keeps Me Awake at Night?
Besides the usual daily happenings of life, what else keeps me awake at night?
Well, it is the thought of the fine line which the Federal Reserve and Treasury and their counterparts elsewhere in the world are doing. It was only a few weeks ago, that the UK added $75 billion (or was it pounds) added to the money supply. And more recently, the US added $1 trillion. I get shivers up my spine thinking about the inflationary pressure that this would create. At the slightest signal that the economy is picking up, Fed would have to step in and begin raising interest rate. That is not as complex as it sounds, except for the fact that the US economy may not be as strong at that moment.
With consumer spending expected to remain anemic and continued job losses, what would be the signal that the economy is picking up? One indicator may be a slight uptick in manufacturing (except that the US does not make much of anything). This uptick would imply that inventories are running low. That somehow seems to be a distant future. Hence, Mr. Bernanke's assertion that recovery will begin in 2010.
But, yes there is always a but. And that is what will derail this recovery? First and foremost, is the unwillingness of banks to attempt to better identify the extent of toxicity in their balance-sheets combined with the hesitation on the part of the Administration to move quickly identify and isolate toxic assets and as I have said earlier move them into an entity akin to Resolution Trust Corporation v. 2.0. I know...I know that the CDOs made it very difficult to identify individual assets. But there is something in the computer world called "reverse-engineering". Because the longer we take to fix this problem, the greater the chance of entering an era of prolonged stagflation when the increased money supply begins to chase too few goods. And also the longer it takes to isolate the toxicity, that much longer the credit markets will remain locked up, and that much longer the job losses will continue to mount leading to more foreclosures and more misery.
And this may yet become America's Lost Decade (similar to what 90s was to Japan). I would almost venture to say that under the current circumstances, speed is more important than accuracy.
And so that's what keeps me awake at night.
Well, it is the thought of the fine line which the Federal Reserve and Treasury and their counterparts elsewhere in the world are doing. It was only a few weeks ago, that the UK added $75 billion (or was it pounds) added to the money supply. And more recently, the US added $1 trillion. I get shivers up my spine thinking about the inflationary pressure that this would create. At the slightest signal that the economy is picking up, Fed would have to step in and begin raising interest rate. That is not as complex as it sounds, except for the fact that the US economy may not be as strong at that moment.
With consumer spending expected to remain anemic and continued job losses, what would be the signal that the economy is picking up? One indicator may be a slight uptick in manufacturing (except that the US does not make much of anything). This uptick would imply that inventories are running low. That somehow seems to be a distant future. Hence, Mr. Bernanke's assertion that recovery will begin in 2010.
But, yes there is always a but. And that is what will derail this recovery? First and foremost, is the unwillingness of banks to attempt to better identify the extent of toxicity in their balance-sheets combined with the hesitation on the part of the Administration to move quickly identify and isolate toxic assets and as I have said earlier move them into an entity akin to Resolution Trust Corporation v. 2.0. I know...I know that the CDOs made it very difficult to identify individual assets. But there is something in the computer world called "reverse-engineering". Because the longer we take to fix this problem, the greater the chance of entering an era of prolonged stagflation when the increased money supply begins to chase too few goods. And also the longer it takes to isolate the toxicity, that much longer the credit markets will remain locked up, and that much longer the job losses will continue to mount leading to more foreclosures and more misery.
And this may yet become America's Lost Decade (similar to what 90s was to Japan). I would almost venture to say that under the current circumstances, speed is more important than accuracy.
And so that's what keeps me awake at night.
Saturday, March 07, 2009
The Economy...And the Saga Continues
The US economy continues to worsen. GM is on the verge of bankruptcy, now that the auditors have cast doubts on their continuation as a going concern. The financial services industry continues to bleed or shall we say hemorrhage profusely.
The Obama Administration is talking tough but not acting as tough. There seems to be a hesitation or reluctance to go all out and act to solve the problem. This is costing us dearly. We - the taxpayers - are putting money in the likes of AIG with no result. The stock market continues to go down (well, it has to stop when it hits zero, if that can be a consolation).
It is time we leave our inner phobias and nationalize these institutions - AIG, CITI, BofA and so on. This nationalization does not mean that we would create a federal bureaucracy to manage them. No. But we should oust all executives, replace them with more ethical professional managers who report to Government Accountability Office, conduct an independent audit, determine the amount (approximations OK specially in favor of classifying an asset as toxic, if it turns out to be otherwise, that would be a pleasant surprise) of toxic asset (or debt), transer it over to Resolution Trust Corporation v. 2.0 and let these institutions be run with a leaner balance-sheet. If we do not bite this bullet soon, we will continue to pump taxpayer dollars in a black hole and Mr. Obama's far of decades of depression will indeed come true.
And let the Republicans suck it up. Bipartisanship is an illusion, which we have no time for.
And job losses continue to pile up. I do not know how Mr. Obama will create jobs when in the last 30 years, we have stopped manufacturing anything in this country in the name of capitalism and free trade. We made funny money by lending money to each other, with no value added. And now the house of card has collapsed.
The Obama Administration is talking tough but not acting as tough. There seems to be a hesitation or reluctance to go all out and act to solve the problem. This is costing us dearly. We - the taxpayers - are putting money in the likes of AIG with no result. The stock market continues to go down (well, it has to stop when it hits zero, if that can be a consolation).
It is time we leave our inner phobias and nationalize these institutions - AIG, CITI, BofA and so on. This nationalization does not mean that we would create a federal bureaucracy to manage them. No. But we should oust all executives, replace them with more ethical professional managers who report to Government Accountability Office, conduct an independent audit, determine the amount (approximations OK specially in favor of classifying an asset as toxic, if it turns out to be otherwise, that would be a pleasant surprise) of toxic asset (or debt), transer it over to Resolution Trust Corporation v. 2.0 and let these institutions be run with a leaner balance-sheet. If we do not bite this bullet soon, we will continue to pump taxpayer dollars in a black hole and Mr. Obama's far of decades of depression will indeed come true.
And let the Republicans suck it up. Bipartisanship is an illusion, which we have no time for.
And job losses continue to pile up. I do not know how Mr. Obama will create jobs when in the last 30 years, we have stopped manufacturing anything in this country in the name of capitalism and free trade. We made funny money by lending money to each other, with no value added. And now the house of card has collapsed.
Friday, February 20, 2009
The Housing Stimulus
I must admit upfront that I have not read President Obama's housing stimulus in great detail. But based on what I read, I think it is a good start. That's right. It is a good START.
According to a commentator from The Economist on NPR, only 12% of the mortgates are sub-prime (sub-prime is defined generally as someone who has a below 600 credit score though there may also be other criteria), but about 50% of foreclosures are sub-prime. Of the 2 million foreclosures last year, approximately 45% were in four states - Nevada, Florida, Arizona and California (not necessarily in that order).
Back to the President's housing stimulus package.
It will begin the process of cleaning out some of these toxic assets. But there are quite a few questions (or as they say the devil is in the details).
I assume that this package will also apply to future to-be toxic mortgages. Currently, the cost of this package is put at around $275 billion but what if GM or Chrysler files for bankruptcy?
The problem with this current recession is that there is no visibility of the bottom yet. May be it would be a good exercise for the financial institutions to look at their books and actually work to determine a reliable estimate of the extent of their assets which are toxic. May be they know this and are reluctant to admit it. Or may be they are clueless. I would bet on the latter, because the process is still ongoing. But for loans bundled as CDOs or MBCSs it is possible (albeit mathematically) to estimate the percentage that would become toxic in the future. This is not a one-day or one-week task, but is doable. Because until we identify the extent of the problem we can not get a handle on resolving it.
According to a commentator from The Economist on NPR, only 12% of the mortgates are sub-prime (sub-prime is defined generally as someone who has a below 600 credit score though there may also be other criteria), but about 50% of foreclosures are sub-prime. Of the 2 million foreclosures last year, approximately 45% were in four states - Nevada, Florida, Arizona and California (not necessarily in that order).
Back to the President's housing stimulus package.
It will begin the process of cleaning out some of these toxic assets. But there are quite a few questions (or as they say the devil is in the details).
- 1. It does not apply to non-Fannie/Freddie mortgages. How many such mortgages are there and what per cent of these are in foreclosure today and may go into foreclosure in the future.
- 2. It does not apply to people who bought homes that they obviously could not afford. What are the criteria to determine this affordability?
- 3. The mortgage payment can not exceed 31% of gross income. What happens if the person is unemployed? 31% of zero is zero. And in case the person is employed, what happens to the difference? Is it being added to the mortgage by extending the term of the loan?
I assume that this package will also apply to future to-be toxic mortgages. Currently, the cost of this package is put at around $275 billion but what if GM or Chrysler files for bankruptcy?
The problem with this current recession is that there is no visibility of the bottom yet. May be it would be a good exercise for the financial institutions to look at their books and actually work to determine a reliable estimate of the extent of their assets which are toxic. May be they know this and are reluctant to admit it. Or may be they are clueless. I would bet on the latter, because the process is still ongoing. But for loans bundled as CDOs or MBCSs it is possible (albeit mathematically) to estimate the percentage that would become toxic in the future. This is not a one-day or one-week task, but is doable. Because until we identify the extent of the problem we can not get a handle on resolving it.
Monday, February 16, 2009
When did This Recession Begin?
Well, that's a very good question.
After the Internet bubble burst in the late 90s, and as we moved into this millennium, the US economy forked such that corporate America improved their profitability by cutting costs (rather than increasing revenue) - they accomplished this by shifting production overseas and other cost-reduction methods. While US consumer income stagnated, this stagnation was compensated by rising housing values which created an illusion of prosperity among consumers. This coupled with cheap and easy credit meant that consumers could continue spending while their income was stagnating and their savings were moving into negative territory.
And then as they say, the chicken came home to roost, when the housing market burst. This was bound to happen as housing prices had moved into unsustainable territory.
So in my opinion, the recession earlier in this decade (I am not sure if it was technically a recession) never really ended, it just became more intense as more fuel was added to the fire.
After the Internet bubble burst in the late 90s, and as we moved into this millennium, the US economy forked such that corporate America improved their profitability by cutting costs (rather than increasing revenue) - they accomplished this by shifting production overseas and other cost-reduction methods. While US consumer income stagnated, this stagnation was compensated by rising housing values which created an illusion of prosperity among consumers. This coupled with cheap and easy credit meant that consumers could continue spending while their income was stagnating and their savings were moving into negative territory.
And then as they say, the chicken came home to roost, when the housing market burst. This was bound to happen as housing prices had moved into unsustainable territory.
So in my opinion, the recession earlier in this decade (I am not sure if it was technically a recession) never really ended, it just became more intense as more fuel was added to the fire.
Saturday, February 07, 2009
The Economy
It is a popular perception that the economic meltdown began with sub-prime mortgages. Though I am not sure how much truth is there in that statement. In my opinion, the problem began when we all started buying homes we could not afford - sub-prime, teaser rates, ARMs, etc. Now one may ask why does it matter? Why split hair now? Well, for two reasons - firstly, if we understand the causes, we may (just may) be able to make sure that it is not repeated in the future. And secondly, we must understand that we are all responsible for causing this crisis. We - the home owners/buyers wanted to get as big a house as we could without worrying about the future. And the greed on Wall Street (of course, taking responsibility for our actions does not reduce the role of Wall Street.
Now, that we are here...
The impact of of housing meltdown on the broader economy did not become obvious until the holidays last year, when consumer spending was substantially curtailed. And then the downward spiral begins. If we buy less, manufacturers have to make less. If they make less, they need fewer people to do the job. That means lay-offs. And then people have less money, because they have been laid off, they buy less and so on. The circle goes around and around.
The Fix.
President Obama's stimulus package (if and when passed) will help. Public works projects always help in that they create jobs. The problem is that it may take longer to materialize due to the nature of these projects. I think we need a short-term solution in the meantime. That solution needs to be something that will give a jumpstart to consumer spending. One way that I can think of is consumer rebates. But with a twist. Instead of the government sending us all rebate checks (as done last year), they should send the money in a pre-paid card with a MC/VISA logo. This would ensure that the money is spent only and not saved or used to pay existing bills. This would have a shorter-term impact while the longer-term projects are up and running.
Are we at the bottom yet?
No. I think we will hit the bottom in Q2-Q3 time frame - late summer-early fall. That assumes no other unforeseen events occur (e.g. natural disaster). I also believe that the uptick we see will be so tiny - if you blink, you miss it. But that will be the beginning of the end. The actual recovery in terms of its impact on consumers will not happen until 2010. In the meantime, tighten the seat belts, it is going to be a rough ride.
And just one more point. Do I think there will be waste in this package? You bet. But we have to start somewhere and improve as we go. Also, I think the onus is on us - the citizens - to be alert about wasteful spending and keep our representatives and government agencies (at all levels) on their toes. After all, as Lincoln said, the government is of the people, for the people, by the people.
Now, that we are here...
The impact of of housing meltdown on the broader economy did not become obvious until the holidays last year, when consumer spending was substantially curtailed. And then the downward spiral begins. If we buy less, manufacturers have to make less. If they make less, they need fewer people to do the job. That means lay-offs. And then people have less money, because they have been laid off, they buy less and so on. The circle goes around and around.
The Fix.
President Obama's stimulus package (if and when passed) will help. Public works projects always help in that they create jobs. The problem is that it may take longer to materialize due to the nature of these projects. I think we need a short-term solution in the meantime. That solution needs to be something that will give a jumpstart to consumer spending. One way that I can think of is consumer rebates. But with a twist. Instead of the government sending us all rebate checks (as done last year), they should send the money in a pre-paid card with a MC/VISA logo. This would ensure that the money is spent only and not saved or used to pay existing bills. This would have a shorter-term impact while the longer-term projects are up and running.
Are we at the bottom yet?
No. I think we will hit the bottom in Q2-Q3 time frame - late summer-early fall. That assumes no other unforeseen events occur (e.g. natural disaster). I also believe that the uptick we see will be so tiny - if you blink, you miss it. But that will be the beginning of the end. The actual recovery in terms of its impact on consumers will not happen until 2010. In the meantime, tighten the seat belts, it is going to be a rough ride.
And just one more point. Do I think there will be waste in this package? You bet. But we have to start somewhere and improve as we go. Also, I think the onus is on us - the citizens - to be alert about wasteful spending and keep our representatives and government agencies (at all levels) on their toes. After all, as Lincoln said, the government is of the people, for the people, by the people.
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