Nouriel Roubini's Global EconoMonitor

Archive for December, 2006

  • Housing Developments Last Week and This Week

    Here are some of the main housing market news and developments from last week and this week, both the good news and the bad news:

    Last Week:

    • NAHB confidence index of home builders further down and at an historic low
    • Building permits down another 3% after falling 5% in the previous month; as low as they were in 1997.
    • Mortgage applications down 10.2 % (down 5.9% for home purchases and 14.6% for refinancing) in the week ending on December 15th
    • Housing starts up 6% after falling 14% the previous month; so they are still down 8% over the last two months
    • Foreclosures in mortgages increasing
    • Subprime borrowers in trouble: study says 20% of them may go into foreclosure


    This Week: 


    • Mortgage applications down 14.2% (down 18.5% for refinancings) in the week ending on December 22nd.
    • New home sales up 3.4% in November while new home prices rising
    • Existing home sales rose marginally by 0.6% in November while their prices fell y-o-y. The excess supply of unsold homes, measured by the months’ of supply of homes on the market, fell marginally to 7.3 from 7.4; it is still very high compared to the 5.0 months’ supply in November 2005.
    • Another mortgage banker closes down
    • Prices of existing U.S. single-family houses declines 0.2% in October according to the composite month-over-month Standard & Poor’s/Case-Shiller Home Price Index of 20 metro areas. And year-on-year increase has decelerated to its lowest rate.
    • Leading home builder Hovnanian Enterprises reports a loss in fourth quarter, beset by a downturn in the housing market
    • Immigrants’ Jobs Vanish With Housing Slowdown (“A slowdown in the construction industry hits illegals much harder than the rest of the general population”)
    • An Index of Pending Existing Home Sales for November and December (a leading indicator of actual sales) – provided by Paul Kasriel of Northern Trust – signals further weakness ahead for sales

    While last week’s housing news were mostly bad, this week’s data were mixed. The strongest good news figure was the 3.4% increase in new home sales; and this figure led many to repeat the argument that housing recession is bottoming out. Existing home sales were up a marginal 0.6% (effectively statistical noise). While the other news from the housing market were much weaker: falling mortgage applications (-14%), both for home purchases and refinancings; falling home prices according to the Shiller-Case index; another mortgage banker closing down; a leading home builder reporting a loss in Q4; many housing jobs that are filled by immigrants (and not as easily recorded in the official data) are now lost.

    What to make of the only piece of clear good news from the housing market this week, the increase in new home sales? Before one jumps to the conclusion that the figure for new home sales is correct and that it points out to a housing recovery, one should look at it more carefully. New home sales are recorded at the time a contract is signed while existing home sales are recorded at the time of the closing. Thus, new home sales do not include cancellations that we know have been sharply increasing and been as high as 30% to 40% among major home builders (Toll Brothers, DR Horton, Hovnanian, etc). So, with mortgage applications falling significantly (for both refinancings and home purchases) for two weeks in a row in December (a cumulative fall of over 25%), one can legitimately wonder whether the reported increase in new home sales is for real or whether, considering cancellations (that are never recorded in this initial data), the actual figure may be weaker. How can actual new home sales being up when home purchase mortgage applications are significantly down in the last two weeks?

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  • What the Recent Fed Reports Tell Us About Manufacturing Ahead

    Market observers pay a lot of attention to the ISM manufacturing index as this is one of the most important leading indicators of economic activity. When the index is below 50 it indicates a contraction of economic activity in the manufacturing sector, i.e. a recession in manufacturing. The ISM fell below 50 (to 49.5) for […]

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  • Holiday Sales Headlines: “Disappointing”, “Lackluster”, “Short of Expectations”, “Tough Times Ahead”

    The headlines this morning with the first early results about the holiday sales are quite downbeat. At the same time, today’s Richmond Fed December report confirms the results of the Philly Fed and Empire State reports from last week: the manfucturing sector is in a recession and keeps on contracting. Here are some headlines about […]

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  • Hard Landing and Soft Landing News of the Week

    Hard Landing Macro News of the Week: NAHB confidence index of home builders further down and at an historic low Building permits down another 3% after falling 5% in the previous month; as low as they were in 1997. Mortgage applications down 10% in the last week after some recovery in previous week GDP growth […]

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  • 20% of Recent Subprime Mortgages Will Go into Foreclosure…And Lending Distress Is Spreading to Unsecured Loans

    The New York Times today (under the title “Study Predicts Foreclosure for 1 in 5 Subprime Loans “) reports that “about one in five subprime mortgages made in the last two years are likely to go into foreclosure, according to a report released yesterday, ending the dream of homeownership for millions of Americans…The report offers […]

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  • Thai Turmoil & Tremor…10 Years After the Asian Crisis…

    The policy flip-flop of Thailand – introducing capital controls on inflows yesterday and partially removing them today after its stock market tanked by 15% – highlights the policy dilemma of any country faced with a surge of capital inflows.

    The current situation is paradoxical: almost 10 years ago – in the spring of 1997 – the Asian crisis started when pressures on the Thai currency led its government to impose some mild controls on capital outflows: then there was a large current account deficit, low forex reserves relative to short term foreign currency debt and an overvalued currency. To speculators Thailand looked like Mexico in 1994 and the speculative pressure started to build up in early 1997. Those mild controls on outflows did not work in 1997 and the currency  collapsed in July 1997 – after a futile defense of the effective peg led to a massive foreign reserve bleeding – triggering the Asian crisis that soon engulfed Indonesia, Malaysia and South Korea.

    Today paradoxically the situation is the opposite as the charts below show: capital in flowing in, not out; the currency is appreciating rather than facing depreciating pressures; foreign reserves are high and short term foreign currency debt is low compared to 1997; and after the 1997 crisis Thailand started to run current account surpluses rather than the large deficits of the pre-crisis period.

    So why the current turmoil in Thailand? It has to do with the typical problems that a small open economy has to deal with when it faces episodes of massive inflows of capital. The policy dilemma in these case as as follows:

    – The country could let the inflow lead to an appreciation of its currency; but such appreciation may become excessive, lead to a competitiveness loss and worsen the external balance.

    – The country can perform unsterilized forex interventions but such intervention increase the money supply, reduce domestic interest rates and may lead to an overheating of the economy that is dangerous

    – The country can perform sterilized forex intervention but such sterilization – by keeping domestic short rates high and unchanged – leads to further inflows and further need to sterilize in an endless cycle that does not stop the capital inflow.

    – The country could implement a fiscal contraction so as to reduce domestic rates (and induce less inflows) and so as to improve the external balance. But such fiscal contraction – in a country without fiscal problems – is politically unpopular and not likely. Also, deficit reduction may paradoxically lead to more inflows if it improves a country creditworthiness.

    – Finally, since all the previous alternatives have shortcomings, the country can introduce controls on capital inflows, especially short-term hot money inflows that are potentially dangerous as such hot money can rush out as fast at they rush in. Such controls on short-term inflows is what countries such as Chile, Colombia, Brazil (and, effectively, even China) introduces as a way to minimize the risks of hot money inflows. And this is what Thailand tried too. 

    Such controls on inflows were overall successful in previous experiences in other countries. So, what went wrong in the case of Thailand? (See also the blogs today by Brad Setser and Felix Salmon)


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  • Is this massive wave of M&A and private equity activity bullish or bearish for the stock market ahead? Bearish

    In the last few days and weeks financial markets have observed a massive amount of M&A and private equity activity; just today the FT was splashing on its front page the headline “Energy Deal Leads $87bn of M&A Activity in 24 Hours“. And yesterday the Lex column of the FT was debating when we will […]

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  • The Concerns of Comptroller of the Currency About the Excesses in the Mortgage Market

    A colleague in the financial sector pointed to my attention a speech that the Comptroller of the Currency – John Duggan –  has recently given where he expressed some serious concerns about the growth of exotic mortgages in the last few years (David Rosenberg of Merrill has made similar points in a recent research note). […]

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  • How far down will the US dollar fall given the still growing US current account deficit?

    What should we make of the significant fall in the value of the US dollar in the last few weeks? Will this dollar weakness persist or be reversed in the months ahead and in 2007? How much will the still large and growing US current account deficit (measuring $225b in Q3 or an annualized $900b as announced today) put further downward pressure on the US currency? Structural, cyclical, market and technical factors all matter in making this assessment (see also the blog by Brad Setser today on the Q3 current account figures and trends)

    The large, still growing and eventually unsustainable US current account deficit is the structural gravity force that will keep on weakening the dollar over the medium term. Indeed, since 2002 the dollar has been significantly weakening relative to floating currencies. This weakening of the dollar was temporarily interrupted and partially reversed in 2005 mostly due to cyclical factors: in 2005 the Fed was tightening while ECB and BoJ were on hold; US growth was perky and sharply outpaced that of Europe and Japan; the Homeland Investment Act (HIA) induced the repatriation of US MNC’s profits abroad at very low tax rates; US asset market – both equity and housing – were perky; and the Eurozone was buffeted by a whole bunch of political shocks (the defeat of the referenda on the new EU constitution; the intra-EU squabbling about its budget;  the inconclusive end of the German elections; the riots in France); the strong willingness of central banks to pile up dollar assets maintained the easy financing of at least 50% of the US external deficit. 

    So, in spite of the force of gravity of a worsening current account deficit, these mostly cyclical factors lifted the dollar in 2005 and allowed it to levitate upward for a while. In 2006 these cyclical factors fizzled away: the Fed went into pause/stop mode while ECB and BoJ started tightening (more the former rather than the latter, thus explaining the still weak yen); US growth slowed down while it is accelerating so far in Europe and Japan; the HIA expired; the housing market started to go into a bust; political problems in Europe mellowed while they increased in the US (Iraq mess; loss of congressional elections by the Bush administration; feeling of lame duckness for this US administration); central banks around the world started signaling restlessness about piling up dollar assets at the same rate as in the past. So, it is no wonder that now cyclical and structural factors are pushing down the US dollar. How further down will the dollar go? One may want to distinguish between short-term trends and medium term ones…

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  • Is China Subsidizing its Exports or Subsidizing US Imports?

    Is China subsidizing its exports or subsidizing US imports? In his written remarks – but not in his actual speech in Beijing – Bernanke urged China to stop subsidizing its exports via a weak RMB (see also Brad Setser’s comments on Bernanke’s speech). He could have as well said that China is subsidizing US imports of Chinese goods, thus keeping Wal-Mart prices and US inflation lower than otherwise. Of course, from an economic point of view subsidizing exports is equivalent to subsidizing imports. But  – from a political economy of protectionism perspective – speaking of export subsidies is putting the blame on “unfair” Chinese policies rather than recognizing, as the term “import subsidy” would have conveyed, that this Chinese currency policy is highly beneficial to US consumers and that it is keeping US inflation lower than otherwise.

    Also speaking of “export subsidies” in the context of currency policy is loaded and dangerous: export subsidies are illegal within the WTO rules. And arguing that a weak currency is effectively an export “subsidy” could even give legal cover to those in the US who may pursue protectionist legal action against China because of its alleged export “subsidies”. This is not an idle threat: when I was at the White House’s CEA in the late 1990s we had to fight non-stop bone-headed protectionist proposals by the Dept. of Commerce that was proposing to change US “dumping” rules to include low import prices due to the weakening currency values of some of our trading partners (for example the Asian currencies in crisis).

    Arguing that a weak RMB is formally an “export” subsidy is – at least politically – as loaded and dangerous an argument as arguing that a weak currency implies dumping. Bernanke’s use of the term “subsidy” in his written speech and of the less inflammatory term “distortion” in his verbal remarks only partially fudged the fact that speaking of “subsidies” in the context of exchange rate policies is a dangerous and risky idea: if countries were to slap tariffs against imports any time a foreign currency sharply weakens based on the argument that this is a “subsidy” and unfair trade pratice we would have trade wars galore all the time.


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