Global home values

One of the stunning aspects of the global housing bubble is the synchronicity in which prices jumped:



In the late 1990s to early 2000s all prices began soaring almost in unison.  At the core is the proliferation of easy access to debt and the financial system going fully into a mania with their addiction to derivatives and black box techniques of stealing from the public.  If you look at the chart most bubbles are already in decline.  The US market has been falling for five years now.  Canada is just starting to turn.

Link -
http://www.doctorhousingbubble.com/global-housing-bubbles-collapse-canada-bubble...
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Just in case anyone thinks that the synchronicity was/is purely co-incidental, think again, think DEMOGRAPHICS & look at the Japanese experience!

What next for the EU and the eurozone? Of the 27 EU states, 25 agreed to join the new fiscal compact at yesterday’s ( Monday 30 ) EU summit. Only the UK and the Czech Republic refused, the Czechs giving constitutional reasons for not agreeing. The agreement ushers in tighter control of national economies at the European level, penalties for breaking the rules and according to most commentators a more German economic style.

The EU and in particular the eurozone’s economic problems were dominant topics at the recent World Economic Forum at Davos. A sense that the global economy is suffering an identity crisis hung over the World Economic Forum and the eurozone’s failure to recover despite the efforts of governments was discussed and referred to constantly. The annual meeting of movers and shakers in the global economy was punctuated with bad news, which provided fresh fuel for what at times seemed like the eurozone’s economic Auto da Fé. Moody’s downgraded eurozone countries, Britain announced economic contraction instead of previously predicted growth, another installment of Greece’s ongoing disaster story, unemployment in Spain exceeded the 5 million mark and warnings of Portugal becoming ‘the new Greece’ all hit headlines while the delegates at Davos talked.

The Romanian government’s way of handling national debt has also been criticized and described as a leftover from the Ceasescu era. Questions about just how governments in Europe handle their interwoven economies have been asked aplenty and economic theory and philosophy debated. Commentators say following Germany’s economic model for closer fiscal union in the eurozone would effectively legislate against Keynesian economics.

Austerity, which has become a mantra for European politicians in recent years, was called into doubt. The negative effect on growth from harsh, unpopular austerity measures now being considered more important than reduction of state deficits, which Europe’s politicians have said time and time again is absolutely essential in recent years. This turnaround has been motivated at least in part by the cold hard facts. The measures simply have not worked in many places. The economic situation in Greece deteriorated despite the implementation of austerity measures. Britain’s economy shrunk after the Conservative/Liberal Democrat coalition promised a return to growth if their policies were implemented. Mariano Rajoy’s new government in Spain is announcing worsening rather than the improving conditions promised when campaigning against then president Zapatero’s enormously unpopular administration. Many are still wondering what’s next for the European economies and more importantly, what will happen to the eurozone.

Link -
http://www.romania-insider.com/austerity-manta-doubted-while-eurozone-future-sti...
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AUS-terity can not work, at this time, it will actually make matters worse!

It's apparent that the labor force kept up with population growth until 2007, and then growth rates diverged. The lack of jobs forced the participation rate reduction, whose magnitude has not been observed over the last 20 years. Despite the recent improvement, we have a clear indication that a typical economic turnaround is not in the cards. The spikes in the "Employed" growth rate are the result of the participation rate being higher than the average.

Based on the data published by the BLS, the average participation rate between 1990 and 2011 was 66.26%, and the same average for the pre-crisis period of 1990-2006 was 66.56%. The official participation rate at the end of 2011 was much lower at 63.96%, and although the difference appears small, it delivers some sobering results.

The average unemployment rate for the 1990-2011 period was 6%, and assuming that population will continue to grow at roughly 1% per year, while using a rounded participation rate of 66%, we need 130,000 new jobs every month just to keep up with population growth.

But there's already a current shortage of 8.5 million jobs using the same 6% average unemployment rate, and to close the gap we need another 360,000 jobs every month, non-stop, for the next three years, or close to 500,000 jobs monthly to return to the norm.

One way is to achieve a lower unemployment rate is to freeze job creation and layoffs today, and drop the participation rate to 60%. By the end of 2012, even with population growth at 1%, the official unemployment rate will be 3.55%, or literally full employment.

How did the participation rate increase over time? A paper (pdf) published by the BLS explains.

    As has been well documented, labor force participation rates among married women have increased dramatically in recent decades, rising from 35 percent in 1966 to 61 percent in 1994.

The writing is on the wall, and the expectation of a garden variety economic turnaround is misplaced. The question remains on how to navigate the future, despite the pockets of hope that will emerge along the way. If we must adapt to the current participation rate, or even drop to the 62.86% average for the 1948-2011 period, we are faced with an excess of business capacity.

Furthermore, if the future indicates that more dual-earner households will switch to single "breadwinners," then consumption will decline, and somewhere out there we'll find the balance. But finding that balance will not happen any time soon.

Link -
http://seekingalpha.com/article/337991-why-u-s-unemployment-rate-is-12-1?source=...
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Nonfarm Payrolls Haven't Kept Pace With Population Growth

The Bureau of Labor Statistics employment situation report for January estimates that non-farm payrolls increased by 243,000, with private companies adding 221,000 to their payrolls, while the unemployment rate dropped to 8.3 percent.

While the most recent employment report data has been positive, the reality is that payroll employment and labor force participation in the US has fallen off the pace of working age population growth since the turn of the century. Non-Farm payrolls peaked in December 2007 at 137.8 million, just one month before the beginning of the most recent recession, which lasted from December 2007 - June 2009, according to the National Bureau of Economic Research.


With 132.4 million people listed on non-farm payrolls through January 2012, we are roughly 5.4 million jobs short of the previous peak in payroll employment. In fact, payroll employment remains at levels first seen just before the March to November 2001 recession, which lasted only eight months with non-farm payrolls peaking at 132.3 million. Prior to today's report, the last time payroll employment in the US reached 132.4 million people was between December 2004 and January 2005.

The problem with this is there is one thing there is no escape from and that is the growth of our working age population. In January 2000, there were 130.9 million people on non-farm payrolls and 209.3 million people of working age. In the last 12 years the working age population in the US has increased by roughly 31.3 million while non-farm payrolls stand just 1 million higher at 130.9 million people.


The above graph illustrates that the growth of the US working age population is relentlessly constant. If jobs are not available for an expanding population, our employment to population ratio will begin to decline and GDP growth has to slow. When was the last time the US had real GDP growth of 4.0% or better? The year 2000.


The US has not had annualized GDP growth higher than 3.5% percent since 2000.

Consumption represents 70 percent of US gross domestic product and current income is the most relevant determinant of consumption. Most Americans earn income from employment and wages. Without payroll employment levels resuming its previous strong relationship to working age population growth, the US cannot grow at 4 to 5 percent annually and will stay in a 1% to 2% rate of growth indefinitely.

Link -
http://seekingalpha.com/article/340171-nonfarm-payrolls-haven-t-kept-pace-with-p...
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This time, IT IS DIFFERENT!

A few observations -
1) US Population Growth, is actually starting to slow.
2) The US Unemployment rate will Decline, as there are now some 330,000 Baby Boomers due to retire each month, for the next 20 years, thus making way for those who may be Underemployed or Unemployed.
3) With the working age Population recently Growing at around 217,000 each month, the current high Unemployment rate could quite quickly fall to record lows, even without any Economic recovery!   

But, as I said, this time is different and for a number of reasons, I don't expect to see US Unemployment hit any record lows.

Neither do I expect to see US GDP return to REAL GDP GROWTH!

The same applies to Europe and also flows thru to all Global markets!

World economy’s uncharted territory

It must now be obvious that, economically speaking, we’re in another country. Things we once took for granted no longer apply; things we never imagined occur all the time. We’ve entered a zone of ignorance where familiar experience and ideas count for less. “Thirty years ago, if you’d said that the United States and Europe were going to be the centers of financial crises, people would have thought you were crazy,” says economist Fred Bergsten. The unforeseen is now routine.

Profound changes to the global economy contributed to today’s crisis and make it harder to resolve. Bergsten — director of the influential Peterson Institute for International Economics — cites three shifts.

First is the rise of “emerging market” countries, led by China, India and Brazil. In 1981, when the Peterson Institute was founded, these nations were laggards. “Now, they’re more than half the world economy and are growing three times faster than high-income countries (the United States, Japan and European nations),” Bergsten said in an interview. “They drive the world economy.”

Second, the United States has moved from the largest-creditor to the largest-debtor nation. Through the 1970s, the United States generally ran trade surpluses, and U.S. multinational investment abroad overshadowed foreign investment here. But since 1980, U.S. current account deficits exceed $8.5 trillion. (The current account is a broad measure of trade.) And foreigners have invested trillions in U.S. stocks, bonds, factories and real estate.

Finally, financial crises have mushroomed. After World War II, countries restricted the flow of money across borders. This changed in the 1970s and 1980s, when these controls were gradually dismantled. Unexpectedly, rapid inflows and outflows of foreign money caused booms and busts: first in Latin America in the 1980s; then in Asia and Russia in the late 1990s. And the American and European financial crises, though largely homegrown, have had global repercussions.

Globalization, it turns out, is a double-edged sword. It raises living standards by promoting trade and spreading modern technology around the world. But it also causes disruptions and deepens downturns. The future of the world economy hinges heavily on whether this instability is modest and tolerable or massive and intolerable. As Bergsten asks: “Are we on a path not only of crises but also of crises of increasing frequency and rising severity?”

We don’t know. What we do know is that mutual dependencies have grown. For years, U.S. trade deficits promoted globalization by boosting other countries’ exports. Ideally, emerging-market countries would now return the favor. Their fast economic growth would swell demand for U.S. and European exports, making it easier for these countries to pay their debts and reduce unemployment. The odds of this happening seem no better than 50-50.

What countries see as their narrow self-interest may subvert their collective interest in a stable world economy. Political power has fragmented along with economic power. The currency dispute with China is a case in point. For years, American presidents have failed to persuade China to stop undervaluing its currency and, thereby, subsidizing exports and penalizing imports. Indeed, some economists argue that China’s trade surpluses — converted into dollars and invested in U.S. bonds — fueled America’s financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans.

By nature, Bergsten — who will retire as Peterson’s director after a successor is found — is an optimist. Unlike the 1930s, he argues, we have institutions (the International Monetary Fund, the European Union and others) that allow enough cooperation to avoid disaster. Europe will muddle through its crisis, he argues, because its leaders recognize that the alternatives are grim. Joblessness would surge. Political and social cohesion would collapse. So the European Central Bank (Europe’s Federal Reserve) will lend whatever is necessary, and Germany will pay whatever is necessary.

Maybe. Even Bergsten’s optimism is tempered. “The next crisis could be a dollar crisis,” he warns. Foreigners own roughly $23 trillion in U.S. stocks, bonds, real estate and factories; Americans own about $20 trillion in foreign assets. That’s the reality of being the world’s largest debtor. A loss of confidence could trigger a sell-off of American stocks and bonds that — given the dollar’s role as global currency — would reverberate around the world.

Foreign faith in the United States ultimately rests on a belief in America’s political stability and economic vitality. Could huge federal budget deficits shake that faith? “The European crisis has shielded us from our follies,” Bergsten says. Worried investors have channeled funds from European securities into American bonds, reducing U.S. interest rates and making borrowing easier to cover $1 trillion annual deficits. There’s no telling what comes next. We are, after all, in another country.

Link -
http://www.washingtonpost.com/opinions/world-economys-uncharted-territory/2012/0...
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I think, I've already had a few fair value guesses!

Is This Recovery?

The thing about GDP is that it is not necessarily a very good measure of economic activity in the sense that it measures what we spend. If you inject more fiat money into the economy it means there will be more spending and a higher GDP. More spending doesn't always mean that those activities will be productive and lasting.

Conclusion

Quantitative easing has only been used once before in U.S. history, and that was during the Great Depression.

You might wish to ponder that bit of information. What that is telling us is that we cannot compare what is occurring now to our experience in prior recessions.

With all due respect to Rogoff and Reinhart, this time is different for the U.S., at least in terms of our modern experience. Fed policies employed in previous recessions which were then thought to work, have failed in our current cycle. Those policies were mainly forms of lowering the Fed Funds rate, reducing bank reserve requirements, and discount window operations. We now have ZIRP and that has done nothing to stimulate the economy as the Fed had hoped it would.

This time we have persistent high unemployment, economic stagnation, a "liquidity trap", high civilian and government debt, low savings, flat to declining wages, and substantial asset devaluation. This has been going on since 2008, a full four years. If it all sounds familiar, these same things happened in the 1930s.

This time is far worse than any other modern recession. What we are seeing now is a depression, despite what the NBER would have you believe. If you are still looking for the "Big One" to happen, you are too late. It happened here and it is still happening here and in Europe. They, like us, have tried to paper over most of the effects of the boom-bust business cycle malinvestment, and they have failed and the piper is at their door.

Within that context, let me sum up my thinking:

1. The economic "good news" is largely based on fiat money steroids and will not last without continuous injections of new fiat money into the economy.

2. The last injection of fiat money (QE2) is already wearing out and money supply is most likely declining.

3. A declining MS will result in further economic weakness (stagnation) and flattening-to-increasing unemployment.

4. This is likely to occur in Q2-Q3 2012.

5. As soon as unemployment goes up again, the Fed will announce QE3.

6. The dollar will continue to be weak.

7. It is likely that price inflation will continue to be "modest" (as the Fed sees it) in light of ongoing real estate related asset devaluation.

Link -
http://seekingalpha.com/article/370771-is-this-recovery-part-ii?source=email_mac...
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This is actually a two part article & it is a lot longer than what shows here, but I think these are the crucial issues!

In essence, the US Government, the US FEDERAL Reserve Bank and to a lesser extent other governments & Central Banks, have injected many $Trillions into the US & Global Economy, both overtly & covertly.

That temporarily raised GDP levels, but also massively raised Debt levels Globally, to levels where further increases will have very serious consequences, for the US, European & Global Economy.

Further attempts to "assist" recovery, via increased Debt,  will also have serious repercussions on Global Currency values, including the Decline of the US$.

We are now between a rock & a hard place, we can not go forward, but neither can we go back.

I believe every effort will be made to kick the can a little further down the road, just long enough to get past the current US elections, due in early November this year.

However, I don't think that is possible and whilst the timing of events of this magnitude are very difficult, I see cracks starting to appear from March/April onward and by the end of this year or early next, the true extent of our current difficulties will start to become apparent!. 

So, Good luck & watch the Debt!

An Epic Australian Bust

The Australian economy today

What the bulls will tell you:
The Australian economy is a true success story compared to those of other developed countries. It almost completely escaped the "Great Recession" and with its GDP slightly dipping for only one quarter in late 2008, its unemployment stands today at an enviable 5.1%. Real estate is booming. Until recently, the Reserve Bank of Australia was raising rates to fight inflation and "economic overheating."

Reality:
The reality is starkly different: Australia has a very vulnerable economy where upcoming bad news has not been "priced in" at all. The country suffers from an epic real estate bubble that greatly exceeds those of US, Ireland, and Spain. The average Australian consumer is completely tapped out. Take out a "consumer credit" punchbowl and reduce the Chinese voracious appetite for iron ore and coal, and the Australian economy will collapse like a house of cards.

Dependence on exports to China
Australia today suffers from a classic case of "Dutch Disease." Its reliance on natural resource exports for its GDP growth stunts the rest of the economic development, especially manufacturing. Australian manufacturing has been declining in relative and absolute terms at a faster rate than it is in the USA and Europe. Today, it imports most of its manufactured goods.


Until several years ago, Australia had thriving tourist and wine industries. The appreciated Australian dollar put a severe dent in their growth.

Australian bulls like to talk about their low debt of 22.3% of GDP and a manageable budget deficit of 3.6% (2011). They, however, completely ignore overall indebtedness, which is on par with other "indebted" developed economies (USA and Italy).

Australia has an unusually high household debt of 105% of GDP, the highest in the developed world (much due to the astronomical real estate prices). The consumer will need to deleverage sooner or later. It's almost certain that, in a crisis, the government will transfer much of the consumer debt to its balance sheet via various "stimulus" programs.

Why the economy is bound to slow down
Looking at the data above, one can see that the Australian GDP is very dependent on two commodities, coal and metal ore, for its economic growth, with most of it going to China.

Should the Chinese economy slow down, there will be few palatable options left. Devaluing the currency may not work because Australia has little manufacturing left to pick up the slack. Lowering rates may not be enough to encourage Australian consumers to spend as the falling real estate prices will force deleveraging. Also, the falling exports would create an immediate current account deficit leading to capital flight, currency collapse, and likely inflation. The Reserve Bank of Australia will not have an option of monetary easing at all.

Australian Real Estate Bubble
What the bulls will tell you:
We hear bubble warnings all the time today as many people see bubbles everywhere where a price has appreciated. You can hear about "commodity bubbles", "treasury bonds bubbles", "new dot.com bubbles", etc.

Australian housing is built on solid fundamentals due to economic and population growth. There is not enough land in large cities to build houses to meet ever-increasing demand.

Reality:
It's always instructive to take a look at historical trends and plot a "mean-reversion" graph before concluding that something is significantly overpriced.

Optimist's claims are not supported by any other data such as high GDP growth rate, rising rates, or increasing construction costs

House prices are grossly overvalued


Australian prices matched some of the other country's bubbles until 2008. But while the real estate process elsewhere has been deflating, the Australian prices marched higher after a brief respite:




What may "pop" the bubble
The Australian real estate bubble has run longer and deeper than recent property bubbles in the USA, Ireland, and Spain. Heavily indebted Australian consumers, just like those in America, have a large portion of personal wealth tied-up in real estate. The price correction has not yet run its course (the mortgage defaults hover around 2%). When it does, it will certainly plunge the Australian economy into a severe recession.

Australian Banking System
Australia has four major banks: The Commonwealth Bank of Australia (CBA), The Australian New Zealand Banking Corporation (ANZ), The National Australia Bank (NAB) and Westpac (WBC in Australia, WBK ADR in USA). While all of these banks are international, the vast majority of their lending and assets are in Australia, with 86% share of all domestic lending in 2012.

Reality:
The banks look well-capitalized today but they heavily rely on a wholesale market (i.e. they issue bonds sold to foreign investors). There isn't enough deposit money from indebted Australians to cover all loans. While everything seems stable today, the foreigners may dump Australian bonds in a panic just like they did with Italian and Spanish bonds, pushing the yields up to prohibitive levels. The Australian banks will look healthy when the economy is good, but they are subject to a large "tail" risk if Australia stumbles, as the capital flow will dry up at the worst possible time.

Interest rates/currency conundrum
Australian currency is strongly correlated with the commodity prices and the health of the emerging markets (the exact opposite of the USA and Japan). Should emerging markets slow down (especially China), the Australian dollar will quickly depreciate.

Australia, which heavily relies on imports of most manufactured goods, will find itself with a sudden inflation problem. It may be unable to introduce a zero interest rate policy (ZIRP) to re-flate local asset prices and save its banks.

How the banks may fail
Australian banks seem safe today sporting low default rates, high ratings from credit agencies, and strong capital adequacy ratios. They will remain safe as long as the Australian economy keeps expanding and real estate prices remain stable. However, once the music stops, I expect a "perfect storm": loan defaults will spike, funding will disappear, but interest rates will still stay high.

Epilogue
The Australian economy seems to be doing well today: the external debt is small, the unemployment is low, and the currency is strong. Yet, in many ways, it's very similar to the US economy in 2007 where much of the economic "wealth" was created by real estate boom and over-leveraged banks. Australia is likely to face its own "Great Recession" in the upcoming years, perhaps when commodity exports slow down. In many ways, this recession may be worse than the American one of 2008, as Australia neither enjoys the benefit of "reserve currency" that would allow it to easily "print" money nor a strong manufacturing base that would benefit from a currency devaluation.

Link -
http://seekingalpha.com/article/394831-an-epic-australian-bust?source=email_macr...
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A few observations -
1) There is more to the article.
2) I may not agree with all of the assertions, but there is enough there to give reason to pause & have some serious considerations!
3) Certainly the Global situation (including the USA, Europe & China), has a long way to run and that will continue to bear down on OZ, for many years.

Thanks for keeping us up to date perceptions. I'm not able to participate much at the moment but I read your posts and can see the train wreck emerging.