Tuesday, October 30, 2007


There's an old saying that goes, "It's a recession if your neighbor loses his job. It's a depression if you lose your job."

Watching the financial news networks and reading the financial publications these days, you'll see many people asking if the U.S. economy is heading into a recession. From my vantage point, the answer is yes. I believe that for many people in certain industries, like real estate, the worst is yet to come.

Economic Ripple Effects

Before getting into why I think there will be a recession, it's important to know the specific definition of the term. Very simply, a recession is a decline in a country's gross domestic product (GDP) for at least two quarters. That means that by Christmas we'll know if we're in a recession or not.

In some ways, the coming recession is a product of the physical phenomenon known as precession. Precession is the effect of bodies in motion upon other bodies in motion -- or, more simply, a ripple effect, like when you throw a stone into a still pond and the waves emanating from it overlap.

While there are many such processional "waves" in the coming recession, one is the lack of integrity in the U.S. monetary system. The United States has defaulted on its financial promises many times in recent history. In 1934, we defaulted on domestic gold redemption. That year, it became illegal for U.S. citizens to own gold. Instead, the government required Americans to turn in their gold, and they were paid $20 in paper money for every ounce of gold they surrendered.

Once the gold was collected, the government raised the price of gold to $35 an ounce. Talk about a lack of integrity. And in 1968, the U.S. defaulted on silver redemption, taking U.S. dollars backed by silver out of circulation. Finally, in 1971, the U.S. defaulted on international gold redemption.

International Impact

Another reason for the coming recession is the subprime mess. And while issues related to the subprime fiasco may seem domestic, they actually have severe international consequences. The subprime mess seems to be a problem associated with lower-income people who can't afford their homes, yet it's really the tip of a very large international iceberg, and it'll affect all of us. Here's why.

In the Sept. 12, 2007, issue of Business Week, Kerry Capell asked the question, "Could any country be more exposed to the credit crunch than the U.S.?" The answer: "You bet, and that place is Britain."

Unlike many of its European neighbors, Britain shares many of America's financial traits. In the last few years, access to cheap credit in Britain has fueled a decade of economic growth, with home prices tripling in 10 years -- an even faster rise than in the United States. With cheap borrowed money, the English consumer has caused the British economy to boom; consumers are responsible for two-thirds of the British economy.

Today, Britain is more dependent upon financial services than we are. So what will happen to the world if both England and the United States go into a recession? The precessional effect is bound to be dire -- especially for working people.

Too Much Money

As strange as it may seem to the average person, the problem is not a shortage of money -- it's too much money. The world is choking on too many U.S. dollars.

Normally, when a currency gets into trouble as the dollar is now, all the country has to do is raise the interest rates on their bonds and things are fine again. But because of the subprime meltdown, the Federal Reserve can't simply raise or lower interest rates.

In simplified terms, the Fed must keep rates low in order to save the domestic economy. This causes the international economy to dump the dollar by not buying our bonds, which is one reason why the price of gold keeps going up -- it's the true international money. And the rise in its price (and in the price of oil) signals the loss of the purchasing power of the dollar; the world simply doesn't want any more dollars. This is a ripple effect from 1971, when the dollar came off the gold standard.

Less for More

The tragedy of this excess of money is that most of the world's workers have to work harder to earn less. This is because the currencies of the world are becoming less and less valuable. Even if workers get pay raises, the boost won't be able to keep pace with declines in the purchasing power of money, increases in expenses such as oil, decreases in the value of homes, declines in the value of stocks, and increases in taxes.

Just look at what's happened in the last decade. Ten years ago, gold was about $275 an ounce. Today, it's over $700. That means that, compared to gold, your income would've had to go up by 250 percent just to keep up with the loss in purchasing power of the dollar. Or, compared to oil -- which was about $10 a barrel 10 years ago and today is over $80 a barrel -- your income would've had to go up by 800 percent.

Sure, there are many people whose incomes have gone up way beyond 800 percent in the last 10 years. The problem is that most people's incomes haven't kept pace, and they're technically in a state of personal recession with no way out.

Throw Yourself a Lifeline

As the global economy continues to gyrate, you'll hear more and more people calling for the Federal Reserve to either lower or raise interest rates. The problem is that the Fed has less and less power to do much.

If it tries to save the domestic economy, the international economy will pound us. If the Fed tries to save the dollar internationally by raising interest rates, it'll kill the domestic economy.

Instead of looking to the Fed to save you, then, I recommend you save yourself by investing in real international money. One way to do so is by purchasing silver. Gold is expensive, but silver is still a bargain even for the little guy. When the recession comes, the ripple effect on your financial future will be immeasurable.

FEMA Aide Loses New Job Over Fake News Conference

WASHINGTON, Oct. 29 — A fake news conference at the Federal Emergency Management Agency has produced, along with outrage and ridicule, its first personnel casualty.

John P. Philbin, until last week the agency’s public relations chief, was supposed to start work Monday as the new director of public affairs for the nation’s top intelligence official, Mike McConnell.

But he learned instead that he would not.

“We do not normally comment on personnel matters,” said a statement issued for Mr. McConnell, the director of national intelligence. “However, we can confirm that Mr. Philbin is not, nor is he scheduled to be, the director of public affairs.”

Last Tuesday, two days before Mr. Philbin left the FEMA job, the agency’s deputy administrator held a televised news conference about the California fires where members of the agency’s staff, pretending to be reporters, asked him a series of easy questions.

No one has suggested that anybody at the agency set out to create a bogus event. But officials gave reporters only 15 minutes’ notice to show up at agency headquarters and then set up a telephone line that allowed them to listen in, but not ask questions.

With no reporters in the room — only television camera crews — FEMA’s public affairs department decided to go ahead with the event anyway. The agency’s own staff played the role of the press corps, posing unusually respectful questions for the deputy administrator, Vice Adm. Harvey E. Johnson Jr., retired. “Are you happy with FEMA’s response so far?” one asked.

In an interview Monday, Mr. Philbin said there had been no intention to deceive the public, just a desire to get information out quickly.

In retrospect, he said, when he realized that no reporters were in the room and it was the agency’s staff that was asking questions, he should have called off the news conference.

“I should have jumped up regardless of how awkward it would had been and said, ‘Wait a minute, time out,’” he said. “My mistake.”

The agency’s administrator, R. David Paulison, who was in California at the time, has come to the defense of Admiral Johnson, a retired Coast Guard officer, saying he was “put in a position” by mistakes of the public affairs staff that have unfairly raised questions about his credibility.

In a memo to FEMA employees Monday, Mr. Paulison said of M. Philbin, “The failure to properly schedule, or to cancel a press conference that had no press in attendance, or capability to ask questions telephonically, represented egregious decision making by the director of external affairs and his staff.”

From now on, Mr. Paulison said, reporters will always get adequate advance notice of news conferences.

“Finally, under no circumstances will anyone other than media be allowed to ask questions at press events,” Mr. Paulison’s statement said.

So far, it looks as if no others will lose their jobs over the incident, but the public affairs office is being reshuffled. As of Monday, Russ Knocke, the press secretary for the Department of Homeland Security, FEMA’s parent, has been temporarily transferred to the agency to supervise the press operation.

The development has been enormously embarrassing for the agency, which is still struggling to rebuild its reputation after its universally criticized response to Hurricane Katrina in 2005.

Citigroup: 'Gimme shelter'

Why on earth, Fortune's Allan Sloan asks, should we protect banks from their mistakes?

By Allan Sloan, Fortune senior editor-at-large

(Fortune Magazine) -- This may sound silly, but let me ask you a question. Let's say that I maxed out my credit at Citigroup to speculate on a house whose market price is now less than what I paid. Citi wants its money, but instead I say, "Sorry, the house is selling for less than its true value. As soon as it sells for what it should, I'll send you a check." What do you think Citi's reaction would be? How about "Sir, where should I send the repo man?"

Well, folks, Citi (Charts, Fortune 500) seems to have put itself in just such a fix by borrowing lots of money to buy assets that have dropped in market value. But instead of summoning the repo (as in repossession) man, some of the world's biggest hitters are trying to set up a huge fund to buy time for Citi and some other institutions with similar problems.

The idea is to set up a $100 billion "master liquidity enhancement conduit" to take some of the $80 billion of suspect securities off Citi's hands so that it doesn't have to sell them in the current market. Other institutions have about $300 billion worth. (This conduit is being called a superfund, to the delight of those of us who live in New Jersey, for whom the term evokes images of toxic industrial waste. But I digress.)

The problem here, as you probably know, involves seven of Citi's "structured investment vehicles," known as SIVs. They borrowed short-term money to buy long-term assets, such as mortgage-backed securities, that have fallen in market value.

Regulators and various big institutions are trying to stabilize things to avoid what we can call SIVilis. That's a financially transmitted disease that could infect the world's financial markets, leading to cascading failures and other consequences too dire to even think about.

Citi won't talk to us about SIVs. The only player who would go on the record is Treasury Secretary Hank Paulson, whose department is in charge of maintaining orderly financial markets.

The problem, Paulson told Fortune, is not merely "the repricing of risk" but also analyzing the immensely complicated securities the SIVs own. "What you're dealing with here is complexity," he told us, and the proposed master conduit would pool not only money but analytical information as well. An interesting concept.

Paulson wouldn't discuss Citigroup or provide details about how bad SIVilis is. But he gets points for coming out and talking.

Citi clearly screwed up with its SIVs. When a financial institution borrows short term to buy long-term assets, it's supposed to have a plan for when its bet goes bad - rather than just whining about "disorderly markets."

Citi now says it has put together enough borrowings to carry its SIVs through year-end, which may be why Paulson told us the problem "isn't urgent."

If Citi's only problem is that it can't liquidate its SIVs without a profit hit, too bad. If Citi's very existence is at risk, I don't think we dare let it fail, because that would drag down institutions throughout the world. But if the bank needs help, its shareholders should have to pay. Bigtime.

Step one would be to eliminate its common stock dividend, currently more than $10 billion a year. Step two would be to force Citi to raise the capital it needs by selling new stock at a price well below its recent $42 a share. That would force holders to either ante up or have their Citi stake diluted. That just might inflict enough pain on shareholders that someone other than underlings would pay for Citi's SIV sloppiness.

In any event, if we believe in markets, Citi should have to take its chances. We small fry take chances when we borrow, and we pay the price if we're wrong. Big fish should have to do the same. Top of page

Friday, October 26, 2007

Crude rallies past $92 to new record

LONDON (MarketWatch) -- Oil futures rallied to a new record high on Friday, with worries about U.S. inventories and Middle Eastern tensions combining to send the benchmark energy contract past $92 a barrel.
Crude for December delivery rose as high as $92.22 a barrel in electronic trading, a day after the U.S. slapped new economic sanctions on Iran. The gains were also driven by worries about potential conflict between Turkey and the Kurds in the north of Iraq.
At 6:30 a.m. Eastern, crude had settled back a bit. It was up 89 cents to $91.35 a barrel.
Oil prices have been lifted by data, released Wednesday, showing a much higher-than-expected decline of 5.3 million barrels in crude supplies. Some believe the $100 a-barrel level is just around the corner.
"An unexpected drop in U.S. stockpiles has added to ongoing concern that supply from the Middle East may be disrupted," said analysts from Saxo Bank in Copenhagen on Friday.
Analysts at MF Global pointed out that neither the OPEC oil cartel, nor non-members such as Russia, seem in any hurry to increase production.
They noted that the consultant group Wood Mackenzie slashed its estimate of non-OPEC production growth in 2007 to 550,00 barrels a day from a million, due to disruptions at a North Sea pipeline.
Gold futures also rose to a 28-year high on Friday. Commodities across the board are getting a lift from expectations that further U.S. interest rate cuts could come as early as next week, and could fuel inflation.

Wednesday, October 24, 2007

Existing Home Sales Plunge by 8 Percent

Wednesday October 24, 12:29 pm ET
By Martin Crutsinger, AP Economics Writer

Sales of Existing Homes Fall by Largest Amount on Record in September
WASHINGTON (AP) -- Sales of existing homes plunged by a record amount in September as turmoil in mortgage markets added more problems to a housing industry in its worst slump in 16 years.

The National Association of Realtors reported Wednesday that sales of existing homes fell 8 percent in September, the largest decline to show up in records dating to 1999. The seasonally adjusted annual sales rate of 5.04 million existing homes was also the slowest pace on record.

The weakness in sales translated into further pressure on prices. The median price -- the point at which half the homes sold for more and half for less -- fell to $211,700 in September, down by 4.2 percent from the sales price a year ago. It marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

The 8 percent decline in sales was bigger than the 4.5 percent decline that had been expected.

Analysts blamed the bigger-than-expected slump on the turmoil that hit credit markets and mortgage markets in August as worries increased over rising mortgage foreclosures.

Those worries resulted in a drying up of the availability of so-called jumbo mortgages, loans over $417,000, which are particularly important in high-cost areas such as California.

"Mortgage problems were peaking back in August when many of the September closings were being negotiated and that slowed sales notably in higher priced areas that rely more on jumbo loans," said Lawrence Yun, senior economist for the Realtors.

By region of the country sales were down 10 percent in the Northeast, 9.9 percent in the West, 7 percent in the Midwest and 6 percent in the South.

The slowdown in sales meant that the inventory of unsold homes rose to 4.4 million units in September. At the September sales pace, it would 10.5 months to eliminate the overhang of unsold homes, a record length of time.

Economists are worried that the huge levels of unsold existing and new homes will put further downward pressure on prices.

Yun said that the price declines should be put into perspective in that they are occurring after a five-year housing boom which pushed prices up to record levels.

He forecast that prices will decline by about 1.5 percent this year. That would be the first annual price decline on Realtors' records going back four decades.

The troubles in housing have been a drag on overall economic growth, increasing worries that the housing slump and related credit market troubles could become so severe that they will push the country into a recession.

However, many private economists believe that the Federal Reserve, which cut a key interest rate for the first time in four years last month, will continue cutting rates in a campaign to make sure that the weakening economy does not tumble into a full-blown recession.

Analysts said the price declines will worsen in coming months until inventories are reduced to more sustainable levels. Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted that the housing troubles will prompt the Fed to cut rates by a quarter-point at its meeting next week.

"The housing crunch is accelerating. The Fed can't stand by and watch," Shepherdson said.

Wednesday, October 17, 2007

How we are fleeced

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since '03

By Howard Schneider and Neil Irwin
Washington Post Staff Writers
Thursday, October 18, 2007; D01

Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.


The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.

It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region. The pensions of most civil service, foreign service and military retirees will match Social Security's 2.3 percent increase. Government workers covered by the newer Federal Employees Retirement System who are age 62 or older will receive an adjustment of 2 percent under the rules of that program.

The Social Security Administration announced another closely watched figure yesterday, raising to $102,000 from $97,500 the figure below which earnings are subject to Social Security taxes. By law, the cutoff is set using a formula based on the change in average wages. Yesterday's recalculation will increase taxes for about 12 million of the 164 million workers expected to pay into the Social Security system in 2008, the agency said.


Retirees are generally better off with low inflation, even if it means a smaller increase in their Social Security benefits, said David Certner, legislative policy director of AARP.


That is because Social Security is the only source of many retirees' income that automatically rises with inflation. During periods of high inflation, they might get a higher Social Security adjustment, but if their savings and other sources of income stay the same, they are harder hit by increases in what they have to spend.

Moreover, the price increases that retirees routinely face are frequently higher than the Social Security cost-of-living adjustment because older families spend more of their incomes on health care and energy than the overall U.S. population. Those costs have been rising faster than prices in general.

"Energy and health care are just far outstripping these COLA numbers," Certner said.


After two years of relatively steep cost-of-living adjustments, this year's increase was modest because of easing energy costs and lower prices for clothing and some other goods. The COLA was 2.7 percent in 2004, 4.1 percent in 2005 and 3.3 percent in 2006.


The cost-of-living calculation was based on a report from the Bureau of Labor Statistics that indicated inflation over the past year was contained but jumped significantly from August because of rising energy prices. Food costs continued to rise steadily, as did prices for medical care and housing.


Overall prices rose 0.3 percent in September from August on a seasonally adjusted basis. Excluding food and energy prices, a measure more closely watched by the Federal Reserve as it guides the nation's economy, the consumer price index rose 0.2 percent in September and 2.1 percent over the previous 12 months.

Economists said that level of consumer inflation, while a bit higher than Fed leaders prefer, is not high enough to tie the central bank's hands as it heads into its next policymaking meeting Oct. 31.


Tuesday, October 16, 2007

Foreclosures hit record high in metro Atlanta

Monthly total takes 49 percent jump over last year

The Atlanta Journal-Constitution
Published on: 10/15/07

Foreclosure actions for metro Atlanta hit an all-time high this month, with 6,809 properties in 13 counties threatened with public auction in November.

The October statistics, released Monday by Alpharetta-based Equity Depot, represent a 38 percent increase over September and a 49 percent jump when compared with October 2006.

"This is the largest swing we have ever seen from month to month," said Barry Bramlett, an Equity Depot vice president.

The total estimated value of properties entering foreclosure in metro Atlanta was $1,076,975,783.

The statistics cover properties published in legal notices in time to go to foreclosure in November. Public foreclosure sales are held at courthouses around the state on the first Tuesday of every month.

Most property owners facing a foreclosure are at least a few months behind with payments. Many avoid a sale on the courthouse steps by filing for bankruptcy, refinancing or selling the property before the auction.

The foreclosure process moves quickly in Georgia. Unlike many other states, Georgia law does not require a judge or any other public official to sign off on foreclosure sales.

So far this year, lenders have published 41,312 foreclosure notices against properties in the 13-county area of metro Atlanta, an increase of 11 percent over the number of notices filed in 2006 through October, according to the Equity Depot statistics.

The longtime publisher of the Atlanta Foreclosure Report, Equity Depot is widely considered metro Atlanta's most authoritative source of foreclosure statistics. The company has closely tracked Atlanta foreclosure listings for investors and lenders for 20 years. No government agency collects foreclosure statistics in Georgia.

Bramlett said mortgages with high interest rates are driving foreclosures across Atlanta. Adjustable rate mortgages make up about half of 2007 foreclosure notices.

"It truly looks like a subprime mortgage problem," said Bramlett. "We're not seeing that many prime mortgages."

About one in four metro Atlanta home buyers in recent years has relied on a "subprime" mortgage. Such loans come with significantly higher interest rates than "prime" loans offered to borrowers who have better credit histories and money for a down payment.

Across the nation, subprime loans are about 10 times more likely to fail than prime loans.

Bramlett said an unusually high number of construction loans also showed up in this month's listings, representing developments that never got off the ground or that failed to sell when construction was complete.

The October totals represented an all-time high for each of the 13 metro Atlanta counties, suggesting that the national mortgage meltdown is touching virtually every corner of the metro area.

Fulton County had more properties facing foreclosure — 1,731 — than any other in metro Atlanta in October. But even Fayette and Forsyth, where foreclosures have historically been rare, saw big jumps this month.

For those behind on mortgage payments, the options for saving a home are more limited than in the past. That's because the mortgage meltdown has virtually halted new mortgage loans to borrowers with poor credit. Those who might have refinanced their way out of a problem in the past have little hope of doing that today.

Experts have anticipated a spike in foreclosures in the last quarter of the year, driven by resets in adjustable-rate mortgages that push payments beyond what many homeowners can afford.

"Now that we are at this kind of quantum level up in terms of foreclosure activity, I think we're going to start really seeing the effects on housing prices," said Dan Immergluck, a Georgia Tech professor who is an expert on foreclosures.

Housing prices in California and Florida, fueled in part by a rising number of foreclosures, already have declined. A decline is likely here, too, Immergluck said, because foreclosures will dump more homes on the market at a time that demand is down, in part because renters with marginal credit no longer qualify for mortgages.

Immergluck said he believes some government action is needed, especially to help prospective buyers get a loan.

The Latte Era Grinds Down

Average Americans were living like the Riches, thanks to easy credit and the real-estate bubble. Now they're trading down instead of trading up.
By Daniel Gross
Updated: 3:30 PM ET Oct 13, 2007

Brian LaCroix, a 34-year-old computer engineer, developed a taste for expensive coffees. Earlier this year, however, he stopped frequenting a French coffee shop in Dallas and bought an espresso machine, slashing the daily cost for deux lattes from $8 to $1. The newlywed and his wife, who have a combined income of about $200,000, have also cut spending by mowing their own lawn. And Brian asked to work from home two days a week to save on gas for his 2002 Ford Ranger. The LaCroixs have been motivated by a combination of factors: frugality, environmentalism and concern about the job and real-estate markets. (Earlier in the decade Yvette, now an operations manager for Fannie Mae, lost her job in the telecom bust.) "We want to be sure that we can afford our home on just one salary without having to dip into savings," says Brian.

For the past several years, American consumers at every rung of the income ladder have been trading up—splurging on a growing array of luxury products, from $4 lattes to $4,000 handbags. With easy access to credit, especially home-equity loans, middle-class Americans began regularly trading up for items that appealed to them, buying food staples at Kroger but splurging on Kobe beef at Whole Foods. Suddenly, everybody was a luxury consumer—for certain items.

But as the saying goes, what goes up must come down. Now many of those same Americans who traded up are shunning luxuries and returning to basics. The upshot: many of the companies that expanded in the hopes of reaching a mass audience of luxury consumers are suffering. Blame the overall slowdown in economic growth, the growing scarcity and cost of credit, and, above all, the sad-sack housing market. "The top 20 percent of households haven't seen a decline in real income, but the bottom 20 percent is suffering and the middle 60 percent is getting by," says Michael Silverstein, senior partner with Boston Consulting Group and coauthor of "Trading Up."

Across the economy, consumers are now opting for smaller, less expensive items. In the past three years, sales of compact cars—cheaper to buy and operate than SUVs—have risen from 13.6 percent to 17.7 percent of total U.S. auto sales, even as automakers' incentive spending per compact car fell by 55 percent. Leasetrader.com, a 10-year-old company in Miami that helps people get in and out of car leases, says that up to 15 percent of its customers are seeking to trade down to smaller cars. "This is the first time in at least six years that we've noticed people wanting to do that," says Leasetrader.com spokesman John Sternal.

Mark and Erin Reed Adams, wedding photographers who live in Reynoldstown, a neighborhood near downtown Atlanta, have kicked this trend down a notch. This spring, they bought a pink 2005 Stella scooter on eBay for $2,300. By using the scooter for most transportation, the couple has cut its monthly gasoline bill by $250. "It's also nice that we're doing our part to reduce our dependence on oil and help the environment a little bit," says Adams.

Like the Adamses, many consumers who are trading down are influenced by the trend toward environmentalism. But for others, simple economics is the main motivator. In October, Alex Yakulis, a 47-year-old marketing executive, and his fiancée, Meg Stewart, put their million-dollar mega-manse in the affluent Dallas suburb of Frisco on the market, posting on a real-estate blog. While he loves the home, and the gated community in which it sits, it was more than they needed, especially with a variable-rate mortgage about to reset. "I find myself going into rooms I haven't been into in a couple months, in a home that's too big with a mortgage payment ready to double," he says. Yakulis still wants his granite countertops and travertine tile—but in a house half the size and half the cost.

He should have no trouble finding one. The median size of newly completed single-family homes, which had been rising steadily, fell from a record 2,302 square feet in the first quarter of this year to 2,241 in the second quarter, according to the Census Bureau. Bernard Markstein, a senior economist at the National Association of Home Builders, says builders are "putting in fewer amenities, [and] a lower grade of cabinet and counter." Meanwhile, many owners of existing homes have stopped remodeling. In the pricy Santa Fe, N.M., area, smaller-scale renovation jobs have dried up. "The $20,000 to $30,000 kitchen job and the $12,000 to $15,000 bathroom are harder to come by than last year," says Douglas Maahs, president of Honey Do Home Repair and chair of the Santa Fe Remodelers Association.

The phenomenon is even having an impact on what people eat. Waiting outside a Beverly Hills Ruth's Chris Steak House, Tom Brant, a retired CPA?who lives in Covina, Calif., said the bill for dinner to celebrate his daughter's 35th birthday hurt: $400 for four people. His real-estate and stock-market investments "aren't doing so well lately," says Brant, 69. "I like to eat out and I like steak. But do I come a couple of times a month. Not lately, or any time soon." McCormick & Schmick's Seafood Restaurants, Inc., a high-end chain that has expanded rapidly from business districts in major cities to places like Dayton, Ohio, hit a wall this summer after 16 straight quarters of comparable-restaurant sales growth. In late September, it reported that traffic at its 72 U.S. restaurants was weak, "which we attribute primarily to less demand from our aspirational guest," as Doug Schmick, chairman and chief executive officer, put it in a news release. Meanwhile, McDonald's and Burger King are reporting supersized sales growth.

Apparel shoppers are similarly sheathing their debit cards. An online survey conducted this spring by WSL Strategic Retail found that 70 percent of respondents were cutting back on spending for accessories like watches, jewelry and bags. And when big retailers posted same-store sales for September, many reported disappointing results: down 4.6 percent at JCPenney, up only 1.2 percent at Target. Consumers are still willing to trade up. "But if someone wants the designer jeans, they'll cut back on something else," says Mary Brett Whitfield, an analyst at TNS Retail Forward in Columbus, Ohio.

The impulse to spend less and save more has always been cyclical. In the aftermath of a debt binge, Americans always rediscover the joys and benefits of frugality—only to whip out the credit cards once interest rates fall. Michael Silverstein points to powerful, long-term trends that suggest customers will continue to reach for luxury. Real income is still growing, and "trading up has been driven over the long term by women going to work and earning wages that are closer to parity with men."

Of course, luxuries and necessities are in the eyes of the beholder. Janie Pryor, a Los Angeles-based jewelry designer, has had to pare back on discretionary spending. Her company's sales have been off for the last year. But thus far she's been resisting cutting back on one luxury: skin treatments, including her beloved Botox. (Pryor, a 48-year-old former sun worshiper, says the injections take "at least 12 years off" her face.) "I'm not there yet," she says of going Botox-less. "But I'm?starting to accept the fact that?that's what I might have to do if this keeps going on." Oh, the perils of a sagging economy.

Thursday, October 04, 2007

Late mortgage payments skyrocket in Atlanta

Late mortgage payments skyrocket in Atlanta

The Atlanta Journal-Constitution
Published on: 10/04/07

Home sweet home for many consumers rests on ever shakier foundations.

Metro Atlantans and Georgians have a tougher time with on-time mortgage payments compared with the rest of the country, based on quarterly reports by Equifax Inc. and Moody's Economy.com.

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In fact, the rate of delinquencies as a percentage of outstanding mortgages was greater in metro Atlanta than in the rest of the country in the second quarter. Mortgages are deemed late after 30 days or more. Many lenders begin foreclosure proceedings after 90 days.

Metro Atlanta's delinquency rate, which stood at 5.07 percent of more than 1 million mortgages in the second quarter, is the highest it has been since the first quarter of 2000, when it was 2.66 percent.


We asked Mark Zandi, chief economist at Moody's Economy.com, to explain what's going on behind the numbers.

Q: Why are Georgia and metro Atlanta's rates so high?

A: I think it's a confluence of things. Lenders have been particularly aggressive in extending subprime mortgages in the state to households that are having difficulty in repaying those loans. The housing market has been soft, and among lower income households in particular the job market for lower skilled workers is weakening. The rate of job growth has slowed, and it's particularly weakened for lower skilled workers.

Q: Measured against past down cycles, how does it compare?

A: I don't think we've seen delinquency rates this high since the Great Depression. The current situation is not in the same universe as the Great Depression, but it's as bad as it's been. It's the worst credit quality (cycle) in the post-World War II period.

Q: Could delinquency rates go even higher?

A: Oh yeah, it will go higher. I wouldn't be surprised if the delinquency rate rose another 1 1/2 percent between now and the end of 2008.

Wednesday, October 03, 2007

Ambrose Evans-Pritchard

Start to take profits right now. Trim any American, British, and European equity that is highly geared to the credit cycle. Layer out of high-risk plays over the next ten days or so, until you reach a defensive level of exposure.

This is no time for bullish behaviour

Do not ride this deranged speculative bull into late October. The balance of risk and reward are just too far out of kilter. Do not under any circumstances join the mad scramble for emerging market stocks. Cut positions in Latin America, Eastern Europe, Asia, and China.

As Alan Greenspan said this week about the Shanghai market, “If you ever wanted to get a definition of a bubble in the works, that’s it.” He also said that US house prices were going to fall “a lot further than people think”. Bet against him if you dare. The relief rally since the Federal Reserve slashed rates half a point to 4.75pc is a moral hazard bet, based entirely on assumptions that Ben Bernanke will debauch the monetary system to boost asset prices.

This is a fatal misreading of the intentions of the Fed, and of Ben Bernanke’s austere moral character and economic ideology. It ignores the nature of the crisis that has ripped through the credit system over the last two months.

The belief in perpetual rate cuts assumes that Bernanke – and the monetary hawks in Dallas, Richmond, and St Louis – can possibly countenance the moral hazard of further stimulus when the Dow is rocketing to all time-highs. This rally is inherently self-defeating. It must short-circuit.

“The equity markets are pricing in a 'Bernanke Put’,” said Rob McAdie, head of credit at Barclays Capital and a man with a front row seat at the credit crunch.

“They are betting that the Fed will cut again and again, but they are not factoring in the effect that this credit squeeze is having on the financial system. Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO market that financed them is effectively closed,” he said.

“Banks are not willing to lend to each other beyond a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a much greater impact on the global economy.”

Yet the markets are indeed betting on a 1998 replay, a reliquified surge into the stratosphere for two more years. Beware. There was no US property collapse then, and the world was still in a benign cycle of falling inflation.

Today feels more like January 2001, when the S&P 500 rallied for two weeks on the Fed’s emergency cut, only to tank by 19pc over the next two months as it became clear why the Fed had taken drastic action – and what this meant for profits. Wall Street fell a lot further thereafter, taking two years to stabilize. The S&P 500 halved in the end.

Or if you like parallels, try October 1987, when the US dollar was falling in the same disorderly fashion we have seen since August this year.

It is fundamentally worse this time: the global dollar index has hit record lows; and the US is no longer a net creditor. It now has external liabilities reaching 35pc of GDP, putting it within a few percentage points of a compound debt crisis.

We will find out from the TICs data in November whether China’s central bank was responsible for the $48bn fall in official foreign holdings of US Treasuries in July. But if China wasn't, somebody was. Who? Why?

The pattern leaves the US reliant on short-term funding to cover its trade deficit. This is a well-trodden path to crisis, as Latin America can attest.

The Fed is boxed in by the dollar, and by lingering inflation. Oil has jumped back up to $82. Copper is over $8,000 a tonne again. Wheat has risen 70pc in a year. Gold has kissed $750, the ultimate reproach.

In the first eight months of 2007, the US consumer price index rose at an annual rate of 3.7pc. It may nudge higher in November and December as base effects kick in. A headline rate of 4pc is not impossible. Does Bernanke want that on his resume? He believes in inflation targeting, after all.

The 10-year “break even inflation rate” as reflected by the US bond markets jumped from 2.27pc to 2.37pc after the rate cut. The yield on 10-year Treasuries has risen from 4.48pc to 4.56pc. Watch those bond vigilantes.

The `China effect’ of falling manufactured prices has gone into reverse. China’s inflation is now 5.6pc, thanks to their dollar-peg policy.

My own view is that inflation will subside as the global economy tips over, but with a lag. It will set off a few alarms first, enough to seriously crimp the Fed.

By the way, while I did not expect the Fed to cut a half point in September, I don’t not share the view that this was a reckless bail-out. It was entirely necessary, given the heart attack in the commercial paper markets – which have contracted $368bn in seven weeks, and are still contracting; and above all, given the speed with which the US housing market is collapsing.

Robert Schiller is now warning that prices call fall 50pc in some areas. It is already well under way. (Interestingly, auctions of foreclosed buy-to-let properties in the UK are selling at 40pc discounts already – buy-to-let is Britain’s subprime)

Yes, the Fed made a grievous error of keeping rates at 1pc until June 2004 – unforgivable in hindsight. It then fell asleep, claiming the subprime crunch was “contained” when it had in reality become systemic. But given the mess we now face, the September rate cut was fully justified.

So batten down the hatches until the storm passes. By all means keep very long-term investments or isolated `rifle-shot’ plays that buck the market.

Will it take a 25pc correction in New York, Frankfurt, and London to flush out the excesses? Or more? Japan’s Nikkei fell 81pc over fourteen years from a peak of 39,000 in December 1989 to a nadir of 7,600 in May 2003. Land prices in Tokyo fell by four fifths. House prices fell by over half.

True, Tokyo delayed recovery with a bad mix of policies in the 1990s. But are the bubbles in America, Britain, Australia, Canada, Ireland, Spain, Greece, Latvia, Romania, Kazakhstan, the Gulf, Argentina, and above all China, really that different from Japan’s errors in the late 1980s?