Rising Global Inflation
April 25, 2008
Long-term rates are about as-were last week, close to post-January highs: 30-year-fixed mortgages just above 6%, the 10-year T-note 3.82%).
However, the situation is changing and thick with propaganda. The keys: the difference between a retreat from panic and return to health, and rising global inflation.
New claims for unemployment insurance topped again at 375,000 last week and this week fell back again to 342,000 -- on edge, but on the right side of it. Stock market types were pleased at stability in March orders for durable goods, and downright thrilled that Ford made a profit last quarter (silly: made $100 million, lost $15.3 billion in ‘07).
The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30% decline in housing prices.” All of them, Robert? Uniformly? Average? Do the math: if half the nation’s homes stay price-flat, the other half must fall 60%. Is that it? Or did you mean to say decline 30% in a few places? Some individual projects are off more than 60% right now (an FL condo or two... AZ and CA land), but the worst dozen mini-metro areas have yet to decline as much as 20%.
In authentic data, OFHEO found that home prices measured by appraisal and weighted by location (CA more than ND; NY more than AZ and NV combined...) rose .6% from January to February. Sales of existing homes are sliding gently, but still moving at a five million annual clip. Sales of new homes are off 37% in the last year, down to a half-million, but that is good news -- the less new inventory, the better.
Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long: the Crunch is over, credit markets are improving. Irresponsible nonsense.
Distress is measured by interest rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.70% to 2.36%, sensible as the Fed at 2.25% is about to pause its rate cuts (keep some dry powder, guys). The Treasury/junk spread has contracted from no-market 8.6% to merely disastrous 7%. Retail mortgages are still 2.50% above Treasurys, almost a point out of line, and no real market for Jumbos or any other securitized credit. Tax-exempt munis paid 1% over taxable Treasurys last month, and now pay the same -- improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening.
All now hangs on the real economy. The financial fire is contained, but the system is terribly vulnerable if a real recession develops, and it has not yet: GDP growth here is probably still above zero. The consumer is in real trouble (the Reuters/UofM confidence measure today fell to a 1982 low), but the Big end of business feels no pain, pulled along by trash-dollar exports and wildly overheated Asian and Emerging economies.
Lost in housing and “subprime” myopia, and domestic navel-gazing: the global rise of terrible inflation, nothing like it since the 1970s. $120 oil will have its consequences. Here, wages capped by foreign competition, food and energy inflation is slowing the economy; Asia/Emerging are in a runaway spiral. Recent annualized figures: China 9%, India 7% (doubled in six months), Philippines 6.9%, Vietnam 19.4%, Singapore 6.5%, Russia 12.7%, South Africa 9%, Saudi Arabia 8.7% (highest since the ’82 oil spike).
There are only three antidotes: the mad good fortune of a commodity collapse, or central-bank induced slowdown, or the ultimate violence of market-induced slowdown.
Global central bankers are cornered, best shown by the Bank of England’s meeting this week. UK GDP in the 1st quarter “grew” by 0.4%, mortgage approvals are down 50% in a year (reduced demand unmet by broken financial markets), but inflation is out of 3% bounds... what to do? The BOE voted 1-6-2 to cut its rate from 5.25% by .25%: one for deeper, six were in favor, and two opposed any cut.
The Fed next week may look a lot like that.
