by Calculated Risk on 2/10/2005 01:07:00 PM

Two recent updates in California show the housing market may be starting to slow. I believe housing (especially New Home Sales) will be the leading indicator of a global economic slowdown.

Morgan Stanley's Stephen Roach has been using the phrase "asset economy" to describe the current situation. If housing slows down, this could take out the main pillar of the asset economy.

Home prices dipped in the OC (Orange County, CA) last month:

"Market-watcher DataQuick said Thursday that the median sales price for all residences in January was $534,000. That's off December's record high of $551,000 but still up 18.7 percent from January 2004.

Total sales last month were 2,903, down 4.9 percent from a year ago. Especially hard-hit were builders, who sold just 197 newly constructed homes -- a 24 percent drop from a year ago. It was the slowest January for builders since 1993."

And in Northern California:

"... real estate market has lost much of its steam in terms of volume. Decreasing volume is 'normal' behavior for the Santa Clara County real estate market for the end of the year. It is the degree of the decrease that remains a concern. Volume went from 154% of the 10-year average to 132% in June. Then went from 132% to 114% from mid-November to mid-December; and finally from 114% to 98% starting January 12, 2005. SCC only experienced 44% of the offers seen during the peak summer. This is a lower percentage than any of the 10-years that we have data for."

by Calculated Risk on 2/09/2005 02:32:00 PM

A report from The Center for Retirement Research at Boston College analyzes the impact of the Bush Administration's proposed Price Indexing on Social Security. Their conclusion:

"The conclusion that emerges from this review of price indexing is that it creates a potentially unstable system. Price indexing does more than simply cut benefits below the amounts scheduled under current law, it cuts them more each year. Eventually benefits will become trivial relative to workers’ earnings. If the goal is to restore balance to the Social Security program by cutting benefits, an across-the-board cut of 20 percent for those under age 55 or an increase in the normal retirement age to 70 would achieve the same result over the next 75 years without putting the system on a downward trajectory."

by Calculated Risk on 2/08/2005 04:15:00 PM

Add the Economist's take: Holding the line? to Macroblog's summary of budget commentary.

Excerpts:

"George Bush has submitted a budget that is tough on discretionary spending for this coming year. But Iraq and Afghanistan, as well as proposed changes to Social Security and the tax code, still leave black clouds on the fiscal horizon"

And more:

"But Mr Bush’s new-found fiscal conservatism is patchy. His current deficits are primarily the result of a collapse in tax revenues, down from 20.8% of GDP in 2000 to 16.8% this year, yet he intends to make his tax cuts permanent. Security spending is also largely exempt from his tight-fistedness. Next year, defence spending will grow by 4.8% in nominal terms, to $419 billion; homeland-security outlays will go up by 1.2%, to $29 billion. And the budget does not include likely “supplementals” for ongoing military operations in Iraq and Afghanistan. Congress has already approved one such supplemental, of $25 billion for fiscal 2005, and is preparing to consider another $80-billion request from Mr Bush.

Indeed, none of these numbers is safe from Congress. Budget hawks fear so-called “Washington Monument proposals”: proposals to cut or close emotive programmes or landmarks, which the public (and their legislators) will never allow."

And on the AMT:

"Other fiscal pain has also been put off, but cannot be avoided forever. One headache is the Alternative Minimum Tax (AMT)."

The major media is looking deeper than the Bush Administration inspired headlines of “Deep Spending Cuts” and “Sweeping Budget Cuts”. That is a start.

by Calculated Risk on 2/05/2005 07:16:00 PM

WaPo 2/5/2005: As SE Asian Farms Boom, Stage Set for a Pandemic

NYTimes 2/5/2005: Bush Budget Calls for Cuts in Health Services

"... Mr. Bush would cut spending for several programs that deal with epidemics, chronic diseases and obesity. His plan would also cut the budget of the Centers for Disease Control and Prevention by 9 percent ..."

Seems like bad timing to me.

by Calculated Risk on 2/04/2005 08:48:00 PM

In yesterday's FT was this interesting article.

Excerpt:

"The Bank of Japan on Wednesday failed to attract enough offers in a bill-buying operation for the first time in nearly two and a half years, raising speculation that the central bank may struggle to meet its ultra-loose liquidity targets.

The BoJ conducts money market operations aimed at keeping the balance of current accounts deposited at the central bank between Y30,000bn and Y35,000bn. Because interest rates have long been at zero, the bank has flooded the markets with liquidity in an effort to head off systemic risk and rid the economy of deflation, which has dogged the economy since the mid-1990s.

On Wednesday, the BoJ sought to buy Y1,000bn of discount bills, but offers from financial institutions - already flush with cash - fell below Y700bn. The shortfall was even more shocking given that the BoJ was conducting a powerful "all offices" transaction in which its regional branches also participated."

Since the US has received most of the financing of its current account deficit from foreign central banks, if the BoJ struggles with its liquidity operations in Japan, would they have difficulty increasing their dollar reserves?

Brad Setser and Nouriel Roubini have been writing some excellent articles on the current account deficit and foreign dollar reserves.

by Calculated Risk on 2/04/2005 06:30:00 PM

Froomkin's WaPo article, "Avoiding the Tough Questions" is excellent.
An excerpt:

"... there are some serious and legitimate concerns that need to be addressed about Bush's Social Security proposals and how they are being characterized.

One overarching issue is that the White House is talking about Social Security as if it were one big underperforming 401(k) program. In other words, they're implying that workers right now get back what they put in plus interest -- and that the interest rate they're getting is not so hot.

But it's not that way, not by a long shot. Social Security is a complex social insurance program that uses payroll taxes from current workers to pay benefits to the elderly, the disabled and their families in a progressive manner that guarantees an income floor below which the least fortunate are not allowed to sink."

Ahhh ... a Safety Net?

An excellent analysis worth reading.

by Calculated Risk on 2/01/2005 11:32:00 PM

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by Calculated Risk on 2/01/2005 11:11:00 PM

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by Calculated Risk on 2/01/2005 09:53:00 PM

The GAO released a report on their recent forum addressing long term fiscal challenges. Three key points:

1) Today's fiscal policy is unsustainable.

2) Health Care Is the Largest and Perhaps Most Difficult Part of the Long-Term Fiscal Challenge.

"Health care is a bigger problem than Social Security. Participants acknowledged the need for Social Security reform but emphasized that Social Security is a relatively small part of the long-term fiscal challenge when compared to spending on health care. One participant noted that the estimated Social Security shortfall is about one-third the estimated cost of recent tax cuts if made permanent. Several participants observed that few members of the public are aware of this. Rather, the general public impression is that solving Social Security would solve most of the longterm fiscal challenge, and this is not correct. Indeed, one forum participant stated that it was only by attending this forum that he had learned that health care spending was a much more important, and potentially far more difficult, component of the long-term fiscal challenge than Social Security.

Participants expressed the view that in characterizing the long-term fiscal outlook, several key distinctions needed to be made between Social Security and the largest federal health programs, Medicare and Medicaid. Participants observed that the public was largely unaware that health spending accounted for a much larger share of the long-term fiscal problem than did Social Security."

3) We need to elevate the public discourse to address the problem. There is a serious lack of leadership, especially in the White House.

"Participants agreed that a key moral context is the impact federal budget deficits will have on future generations. Another key moral context is integrity. Some participants called for greater integrity, e.g., transparency, in the federal budget process."

And a table of fiscal exposures (billions of dollars, End of 2003):
See page 50, GAO-05-282SP CG Forum

Selected Fiscal Exposures: Sources and Examples

Explicit Liabilities
Publicly held debt ($3,913)
Military and civilian pension and post-retirement health ($2,857)
Veterans benefits payable ($955)
Environmental and disposal liabilities ($250)
Loan guarantees ($35)

Explicit Financial commitments
Undelivered orders ($596)
Long-term leases ($47)

Financial contingencies
Unadjudicated claims ($9)
Pension Benefit Guaranty Corporation ($86)
Other national insurance programs ($7)
Government corporations e.g., Ginnie Mae

Exposures implied by current policies or the public's expectations about the role of government
Debt held by government accounts ($2,859)b
Future Social Security benefit payments ($3,699)c
Future Medicare Part A benefit payments ($8,236)c
Future Medicare Part B benefit payments ($11,416)c
Future Medicare Part D benefit payments ($8,119) c
Life cycle cost including deferred and future maintenance and operating costs (amount unknown)
Government Sponsored Enterprises e.g., Fannie Mae and Freddie Mac