Welcome to the Bear Market Forum.

Discuss investing strategies and economic events this forum.

By Molly Seltzer, Bloomberg

Treasuries are moving into a “full- blown” bear market as global stimulus packages increase demand for capital, according to Citigroup Inc.

“This may sound a bit ridiculous, but we think we have begun a full-blown bear market in fixed income,” wrote Tom Fitzpatrick, Citigroup’s New York-based chief technical analyst, and London-based strategist Shyam Devani. “The commodity that is going to be the most in demand as far as the eye can see is capital. As a consequence, the cost of capital can only go one way — up.”

The 30-year bond’s yield may rise to 5 percent by late 2009, the highest level since August 2007, according to Citigroup. The U.S. will probably borrow $2.5 trillion this fiscal year, compared with $892 billion last year, according to Goldman Sachs Group Inc. The firms are among the 17 primary dealers that trade directly with the Federal Reserve. Read more….

California Association of Realtors C.A.R. Data

The following chart is from my friend “TC” who has been monitoring California Association of Realtors (C.A.R.) and DQNews data. C.A.R. data contains resale single family residences and new homes. DQNews data contains resale single family residences and new homes.

click on any chart in this post for sharper image

Median nominal prices in CA are now down 53% according to CAR and 48% according to DQNews – and those declines are in 19-20 months!

Case-Shiller is a more accurate way of looking at home prices than median prices. Case-Shiller data follows.

Case Shiller January 2009 Release

Inquiring minds are considering the Case Shiller Home Price Release for January 2009.

Home Price Declines Continue as the S&P/Case-Shiller Home Prices Indices Set New Record Annual Declines.

New York, January 27, 2009 – Data through November 2008, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, with 11 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus November 2007.

The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 11 metro areas described above, the 10-City Composite matched last month’s record decline of 19.1% and the 20-City Composites set a new record, down 18.2%.

“The freefall in residential real estate continued through November 2008,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Since August 2006, the 10-City and 20-City Composites have declined every month – a total of 28 consecutive months.

The chart above shows the index levels for the 10-City Composite and 20-City Composite Home Price Indices. It is another illustration of the magnitude of the decline in home prices over the past two years.

Please see the original article for more commentary and tables on the data.

Case-Shiller Declines Since Peak

The following charts were produced by my friend “TC” who has been monitoring Case-Shiller Data. Although individual cities topped at varying times, the top-10 and top-20 city composites peaked in a June-July 2006 timeframe.

Case-Shiller Declines Since Peak Current Data

click on chart for sharper image

Case-Shiller Declines Since Peak Futures Data

click on chart for sharper image

“TC” writes:

The Nov 2008 Case-Shiller data continues to accelerate to the downside. The 10 and 20 city index show declines from their peak in excess of 25% and the bubble cities (along with Detroit) all have declines in excess of 30% with Phoenix having the largest percentage drop of -43% and San Francisco having the largest price drop at $351,000+.

It is important for readers to know that Case-Shiller uses a Repeated Sales Methodology (RSM) which provides the most accurate housing data available. Additionally, as requested I’ve added two columns titled “Price Level” which show both the last time prices were at the current level and what price level prices are projected to decline to based upon the CME Futures market.

The most extreme bubble city decline is once again San Francisco which is at prices last seen in May 2002. However, the most extreme overall city is Detroit which has now reverted to prices last seen in Aug 1997.

This additional data is even more interesting when you look at the projected trough months. For example, Los Angeles is expected to trough in Nov 2010 at prices last seen in Jan 2003. However, those Jan 2003 prices are an amazing 44% higher than LA prices were in Jan 2000. Consequently, we can certainly go a lot lower and it appears that even the Futures market may be too optimistic about when this market bottoms.

Lastly, the sheer number of negative quarters in every city continues to amaze as 14 of the 20 cities have now experienced 9 or more consecutive quarters of prices declines!

Thanks “TC”

Those wanting to see still more graphs of housing and other data should take a peek at another fine post by Calculated Risk called January Economic Summary in Graphs.

My take is unemployment is going to soar in 2009 along with foreclosures, credit card writeoffs, and bankruptcies. Those will add to the inventory problems. Thus it is extremely unlikely that housing bottoms anytime soon.

And as much as housing prices have declined, take another look at the second chart in the news release above. Imagine where prices will be if they fall back to 2003 levels or worse yet 2001 levels. Moreover, why shouldn’t prices fall back that far? Finally, how many are prepared for it, if indeed that were that to happen?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Perhaps the Internet isn’t quite as “free” as we thought.

Correspondent Subuddh P. recently busted me for saying the Internet was “free.” Here is his thought-provoking commentary on the true costs of the Web:

The web is not free. It is not really that free economically and it is most certainly not free ecologically and its hidden social cost is enormous. If anything the web is perhaps the most costliest invention of the industrial revolution.

Let us consider the the environmental cost. Google lets you search billions of pages for ‘free’. Your search request goes to thousands of machines that are running twenty four hours a day and they require lots of power. Take one day to observe yourself: how many web hits did you make, how many times did you check your email? Each one of these activities requires power and fuel to generate that power. Now imagine billions of people around the world doing the same thing.

This link added by CHS: ‘Carbon cost’ of Google revealed (BBC News)
US physicist Alex Wissner-Gross claims that a typical Google search on a desktop computer produces about 7g CO2.
However, these figures were disputed by Google, who say a typical search produced only 0.2g of carbon dioxide.
A recent study by American research firm Gartner suggested that IT now causes two percent of global emissions.
Dr Wissner-Gross’s study claims that two Google searches on a desktop computer produces 14g of CO2, which is the roughly the equivalent of boiling an electric kettle.
The Harvard academic argues that these carbon emissions stem from the electricity used by the computer terminal and by the power consumed by the large data centres operated by Google around the world.
Speaking to the BBC, he said a combination of clients, networks, servers and people’s home computers all added up to a lot of energy usage. End of BBC excerpt.

The technology business also generates tons of toxic waste. The turnover for hardware is huge, a business is always updating its hardware all the time and the need for resources is exponential in its growth. Besides, without the tools and consequent costs of the industrial revolution the web would not be possible in the first place.

If you want to measure carbon footprints, please, measure the footprint of your using the web.
Now look at the economic cost. Google search is free now, but it is free like television is free. By advertising, creating need for things you don’t really need. Oftwominds has had a number of pieces on the advertising machine that manufactures needs. With the credit bubble bursting the average purchasing power is going to be less. In the short run Google may even benefit from this as more and more people go to Google as a cheap way to sell their stuff.

But if more and more people go broke, this advertising will dry up. It’s worth remembering, you can’t be rich if everyone is poor and makes nothing, because no matter how great your knowledge, if nobody can afford to buy what you make then you will be broke, too.

And the social cost? Well, putting aside the obvious, like surfing addiction, information overload, social withdrawal, porn addiction, the far bigger cost is this: the web gives us the illusion of unlimited *ever improving* choice, which if we buy into it, can only destroy us. Nothing has the potential to ruin a person’s life quite like living with this illusion. Even poverty is better. People can still find love, community and fulfillment while being poor.

This is not about having the option of fifty different types of cereals, it’s about believing that there is unlimited choice for the important things in life, namely work and family. This illusion allows us to flake out when things get a little demanding or troublesome, there is always something else out there.

Consider online dating which is so popular these days. How easy is it to just flake on the match du jour, break off communication midway because it’s too much trouble, you are not really hundred percent sure and there is always some other match right around the corner? After all, don’t we get the daily list of matches of new all seemingly exciting people? We can put it off because it’s easy to do so and we are not worried because we think there are always other options.

But the human psyche does not work like that. Psychologists will suggest that most people are capable of genuinely caring for at most two or three people in their lifetime, with the usual degrees and exceptions, and this is most likely in their twenties and early thirties. This is when our habits are being formed. At thirty-five the body reaches its peak; after that it’s a slow process of decay.

And it takes years to establish any solid relationship. All that romance that at least some of our grandparents and even our parents seemed to have, that everyone talks about but seems so elusive today, it required perseverance, commitment and being true to your word, it didn’t just happen. It also helped them that they didn’t believe that had that many choices…

The same is true for career. If we jump around from one thing to the next we cannot develop anything in depth. Ditto friendships. Contrary to what the myspace profile might suggest, we can’t really have a thousand friends. Again, psychologists will suggest most people can have at most a dozen or so close people in their life; the psyche cannot handle more than that.

The closeness does not develop with an easy come easy go attitude. It is the shared history that creates the bond and the kind of friendships we can make at twenty are very different from those we can at forty. The reality is that to build any kind of a solid career or relationship we don’t really have that much time nor do we have that much choice. ( The case for settling for Mr. Good Enough Atlantic Monthly)

Three things have historically restrained human beings. The first two are scarcity and incompetence. The third is an acknowledgement of our mortality and a higher function in life. Why is it that so many Buddhist and new age healing centers have sprung up in America? People are hungry, perhaps they have spent too much time living with these illusions, too much time working in cubicles starting at a fluorescent screen while living in splendid isolation with no community and ritual, all the while justifying the isolation by saying they are searching for true this or that.

It is not technology that is to ‘blame’ per se. Human know-how is neutral. But even though we may know how to make things better, the human psyche is still the same; we still will go through the same pedagogical cycle. We still make the same transitions, from adolescence to adulthood, from dependency to responsibility, from caring about ourselves to caring about someone else, from maturity to inevitable decline and death.

The mythology of any given time has to prepare us to to live our life cycle while incorporating the tools available; to help us make these transitions during the window of opportunity when we can, while going through the training necessary to successfully make them.

So what are the myths we live by? This seems to be the state of the technology enabled modern mind and it seems a kind of cosmic joke. We believe we have unlimited choice while throwing away cultural values which would have helped us actually make choices.

We postpone the important transitions of life because we believe we can always do them later, and we must be free to do them only when we choose to, as if time will stop for us. We insist that the perfect love, perfect career and perfect everything are out there and fully believe that not only can lightning strike us, but it will strike us, we are entitled to it and it is necessary to hold out for it.

We insist we must feel passion for whatever we do, but reserve the right to flake out whenever things get involved, which is when we actually feel some passion. What is this but, as the thirties and forties roll in, a recipe for introversion, lots of time on the therapist’s couch and that prescription for valium and prozac? All this at a time when we are entering a world of far greater scarcity.

The piece on the death of the expert brought suggestions of elitism. But consider the pilot of the US Airways plane who brought the plane down safely in the Hudson. Captain Sullenberger is being described as the last of the American Gentleman; as someone who who took his responsibility of being captain seriously, who was ready to leave his sinking ship only when the last passenger had been taken off, a man of impeccable manners.

Who thinks these kinds of values just happen? Of course they don’t and of course they are elitist: they can only be learned over years of training, commitment, sacrifice and hard work. And Captain Sullenberger is the elite of the elite, the best of the best. Why is he the last of the American gentlemen? Because we no longer care about these values. But ask yourself, the next time you are on a plane would you rather it be commanded by someone who has these values or someone who doesn’t?”

Thank you, Subuddh, for this cornucopia of food for thought. Subuddh requested I post his email should you wish to correspond with him: subuddhparekh1@aol.com

Here is a related essay of mine, written in the first days of this blog: Flattening the Knowledge Curve: The “Googling” Effect (May 2005)

Thank you, Robert P. ($10) for your very generous contribution to this site. I am greatly honored by your support and readership.

Thank you, Mark M. ($10) for your much-appreciated donation to this site. I am greatly honored by your support and readership.

The NYC metro area has the highest aggregate price index in the country and has declined the least. Many sales people in the area have preached (up until a few quarters ago) that NYC was somehow immune to the laws of economics. Well, BoomBustBloggers are smarter than that. NYC metro has also experienced the largest price decrease on record in the month of 11/2008, and that was before a serious wave of firings and layoffs.

Believe it or not, the aforementioned is the good news. T [...]

Read more….

No matter whether you are a small or big-time investor, nor what your stock fund strategy, nothing seems to be working. And this has been true for at least the last year. Here’s further proof of that …

Read more….

For some serious Cliff Diving, please see my earlier post: January Economic Summary in Graphs

My friend Ramsey Su writes in the WSJ: Why Be a Nation of Mortgage Slaves?

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit …

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.
…
What is the market telling us? Dataquick recently released December sales data for Southern California, once the hotbed of speculative excesses supported by nontraditional financing. Foreclosures now dominate sales. Prices are down. Sales volume is up. New home construction is down. These are beautiful textbook illustrations of supply and demand driving price and market equilibrium.
…
The media should interview those who had been foreclosed upon. Do they feel sorry or relieved? Are they rebuilding their credit, not to mention their lives? Do they miss the pressure of having to make payments they cannot afford on a McMansion that belongs to the lender?

Ramsey makes some very valid points:

MEDIA: I’d like to see some interviews with homeowners who went through foreclosure a year ago or more. Usually we see interviews with people in the foreclosure process or who just lost their homes. Ramsey asks some interesting questions: Are they better off today? Do they feel depressed or relieved?Read more….

From CNBC: ‘Bad Bank’ Run By FDIC Possible By Next Week: Source

The talks are said to have yielded agreement that the FDIC would run the bad bank, according to an source. … Thursday could be the announcement day.

There is more in the article, but not really anything new.

Meanwhile the WSJ is reporting: ECB Drawing Up ‘Bad Bank’ Guidelines

The European Central Bank is drawing up guidelines for European governments that are considering so-called “bad banks” to house banks’ toxic assets. The ECB is also working on guidelines for European governments that plan to guarantee toxic assets remaining on banks’ books, another form of bank bailout.

Both sets of guidelines are being drawn up with the European Commission. The ECB hopes the guidelines can help avoid competitive one-upmanship across the 27-nation European Union as nations seek to shore up struggling banks.

The ECB, which makes monetary policy for the 16 countries that share the euro currency, has no power to enforce any guidelines it develops.

It looks like the Bad Bank idea is moving forward …

Read more….

It was announced today that Obama will soon reveal a new economic strategy that would lower mortgage costs. But, we also need more realistic qualifying standards that reflect today’s financial realties; otherwise, if few can get a new favorable mortgage loan, what is the benefit of having lower rates?

The general consensus in the mortgage industry right now is that more than 50% of refinance applications are being declined and some banks are financing less than 25%. Many of these applicants are not being declined due to poor credit, lack of income or payment defaults, they are being declined simply because the current credit standards are too tight during this credit crisis. Even applicants that are accepted are not being approved for the low average rates we are hearing about. Various points are being added to loans along with “penalty” interest rate increases. We have swung from the too loose sub-prime days to the credit crunch we are experiencing today and we must find an acceptable median.

Most homeowners that responsibly put 20% down on a home purchased anytime in the last 7 years (or longer in some areas) have seen their 20% equity vanish. Many people also have experienced pay cuts and small business owner revenue has declined, which has (hopefully temporarily) raised their income to debt ratios above 50%. Many banks are now requiring income to debt ratios of 45% or less and 20% equity so this new group of homeowners are getting squeezed out of the refinance boom. Money is tight, but these applicants are still making their mortgage payments. Without some rate relief, however, they might end up being forced into the next wave of foreclosures.

Acceptable equity requirements for refinancing should be 0-5% of the current home appraisal value (many bank appraisers are already low balling house values) and income to debt ratios should be raised to 55 or 60% (lower rates will also help lower this ratio). These are reasonable terms for today’s responsible, working class that are being pulled down by our current economic slump. We need to help the working class weather this storm so that, when we get through this, they can rebuild their equity and enjoy reasonable housing costs.

Millions of households were sold ARMs that will begin resetting in 2009 to 2012. At current low interest rate levels, most of the resets in 2009 should be fine since their rates will remain similar to what they are paying now. But why allow this group to be a ticking time bomb sometime down the road when rates increase? We can help them into affordable lower rates now.

Experts are expecting another wave of mortgage defaults on Alt-A and Option ARMs mortgages which will dwarf the Subprime mortgage crisis. Plus, many small businesses which employ 1-10 employees (which represent millions of jobs total) will be caught in this mess. It is estimated by the National Association for the Self-Employed (NASE) that 3,709,800 small business owners hold Alt-A and ARMs that are coming due between 2009 and 2012. If these businesses – many of which are owner home-based – are overburdened with mortgage payment debt, many could fail. These business failures will accelerate job losses and contribute to the overall economic problems we are facing today.

By stipulating a 30 year mortgage lending rate of around 4.5% or less, the government can help homeowners refinance their current ARMs (and those with higher rate current 30 year fixed) into lower monthly payments. This does not mean we have to go back to weakened sub-prime loan criteria; but that current homeowners are given a real chance to stay in their homes with lower, stable interest rate payments.

I can already hear the groans of some readers, “why should they get bailed out, they took the risk of getting the loan” or “it’s risky to loan money to someone who has little equity and might lose their job, let the free market sort it out”. But if we continue to do nothing to help our neighbors during these difficult times, then this severe recession will most definitely turn into a full blow depression. It’s time we stemmed this free fall from the bottom up. Instead of using tactics that support a “free market for the working class” and “socialism for the rich and corporations,” it’s time to accept today’s reality.

The fact is the government is going to give out trillions of dollars to try and stem this economic collapse. We can continue bailing out the banks and Wallstreet or take a more reasonable approach by helping out the middle class in a real tangible way. I vote my tax dollars to help my neighbor into a stable, low rate 30 year fixed loan. And, if some of them still default, so be it. But for most, this will help stabilize their financial situation which will help us all by stabilizing the economy.

Lowering mortgage rates and easing qualifying standards for both new home buying and for refinances will help stimulate the economy and buoy the middle class. This directly puts money in the pocket of the middle class consumer instead of the helping fuel lavish banker lifestyles. We should be focusing on getting tangible relief to responsible homeowners caught in the housing meltdown and economic crisis by helping them get into stable 30 year fixed mortgages at current low rates. Any housing legislation needs to address the availability as well as the cost of loaned money.

Read more….

Campbell Brown, the anchor of the CNN program “No Bias, No Bull,” has challenged conservative radio host Rush Limbaugh to come onto her show and debate the merits of the stimulus package. CNN’s chief business correspondent Ali Velshi had criticized Limbaugh’s stimulus suggestions, offered on the op-ed page of the Wall Street Journal, and Limbaugh fired back at Velshi on his radio show yesterday, calling Velshi “incompetent.”

Campbell had Velshi on her show last night to address Limbaugh’s criticisms in a lengthy rebuttal. She then invited Limbaugh to come and debate the stimulus package with Velshi, instead of just lobbying personal attacks on his radio program. We’ll see if Rush accepts the challenge.

Watch the clip of Brown and Velshi below.

Embedded video from CNN Video

CAMPBELL BROWN, CNN ANCHOR: But, first, we are “Cutting Through The
Bull.”

And, last night, on this program, we spent some time talking about Rush Limbaugh and a piece he had in “The Wall Street Journal” arguing there should be more emphasis right now on tax cuts to help the economy.

Our chief business correspondent, Ali Velshi, came on and took issue with some of what Limbaugh said.

Rush then responded with this today.

(BEGIN VIDEO CLIP, “THE RUSH LIMBAUGH SHOW”)

RUSH LIMBAUGH, RADIO TALK SHOW HOST: Mr. Velshi, you are incompetent. You are a disservice to your business, except you fit right in at CNN, disinformation, character assaults.
This economy is nowhere near as bad as it was in 1982.

(END VIDEO CLIP)

BROWN: So, let’s stop there.

Now, Mr. Limbaugh, you may well have a legitimate case to make about tax cuts and what they can do for the economy, but the histrionics and the name-calling, they undermine anything constructive you might have to say.

Rush, I would love for you to come on, on this show and debate Ali on the issues. Make a case for your ideas. Our country is in desperate straits right now, and we need ideas. But what we don’t need is nasty rhetoric and useless noise. This doesn’t help anyone get a job or keep a job or feed their family.

If there were ever a time to put the meanness behind us and focus on real dialogue and real solutions, this is the time. And, on that note, we invited Ali to respond, not to the name-calling, but to the substance of this debate.

We’re putting ourselves to our NO BIAS, NO BULL test tonight. And, Ali, let’s see, you know what you are. You’re incompetent. No, seriously. I mean, let’s deal with the substance of the issues and forget the other stuff he said.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Right. Right.

BROWN: And, with that in mind, let me play a little bit more of what — of the case he made on his radio program.

VELSHI: Sure.

(BEGIN VIDEO CLIP, “THE RUSH LIMBAUGH SHOW”)

LIMBAUGH: Now, Mr. Velshi, after calling me a liar — and I’m not even a business reporter, but you pretend to be — 1986, GDP down over 6 percent. We were in a recession.

What was the centerpiece of Mr. Reagan’s economic recovery plan, Mr. Velshi? Let me spell it for you, T-A-X C-U-T-S.

In fact, Mr. Velshi, you may not have seen anything like this before, but I have. I have seen worse. I lived through worse.

When Ronald Reagan took office in 1981, the top marginal tax rate, Mr. Velshi, was 70 percent. When Ronald Reagan left office in 1989, the top marginal tax rate was 28 percent.

(END VIDEO CLIP)

BROWN: All right. So, he argues the economy much worse in the early ’80s than it is right now.
Does he have a point?

VELSHI: Yes, I mean, I don’t want to get into a “My recession is worse than your recession” argument. But, ultimately, I am going to have to interject with a few facts that he might have to think about. We have — unemployment was higher back then than it is today. It was 10.8 percent. It’s 7.2 percent right now.

But 2008, we saw the price of a median single family home drop 15 percent. Never before have we seen that on record. Industrial production, which is the measure of how much we actually make in this country, has never been lower than it is right now.

Personal income, adjusted for inflation, was higher then than it is today. Personal savings — right after Reagan got elected, people were socking away 12 percent of what they made, today, virtually nothing, which means we don’t have anything to get us through a recession.

But put all of the economic talk aside for a second. Ultimately — we have talked about this many times — this is an economy that is based on people’s willingness to spend money, more than any other economy in the world. People are not willing to spend money.

And just to give you the one indication of this that we always talk about, and it’s consumer confidence. Inconveniently, for Mr. Limbaugh, the standard for consumer confidence was set in 1985. So, 1985, whatever consumer confidence was back then is considered 100. Today, it
is at 38. It is the lowest it has ever been.

Until consumers start buying, businesses will not start investing. You can give them all the tax cuts you want; they can’t.

Now, he is right about something. Reagan cut taxes from 70 percent to 26 percent. They’re 35 percent right now, the top marginal tax rate. So, we don’t — we can’t halve them.

Back then, when you took them from that rate over a course of years, down to 26 percent, even if you didn’t believe in tax cuts, you would really believe that that would be stimulative.

So, ultimately, there are two schools of thought, cut taxes or stimulate the economy another way. Virtually nobody falls into one entirely camp or the other. I, too, would like to pay lower taxes.

But, ultimately, the facts are the facts. But maybe it was worse for a lot of people. Every recession is hard on — on some people. But we are in a very dire situation right now.

BROWN: All right, Ali Velshi with that perspective tonight. Certainly, I will reiterate my request for Rush Limbaugh to come on.

VELSHI: Absolutely.

BROWN: And we could actually have this as a debate. But, Ali, appreciate it tonight. Thanks, as always.

Read more….