by Calculated Risk on 5/20/2005 01:01:00 AM

UPDATE: Error correction (thanks to fatbear), I wrote millions instead of billions in several places.

The April trade balance will be reported on June 10th. Over the next couple of weeks, I'm going to try to develop a simple model to predict the trade deficit. I'll post my methodology and hopefully others will offer suggestions and improvements. Of course, it takes more than one month's data to make a trend and these predictions are just for fun.

My general approach will be to divide the deficit into two components: petroleum energy related products and everything else. This is a mixed model, by "goods" for petroleum, by country or region for everything else. We have to be careful: there can be overlap between a country approach and petroleum approach: Canada and Mexico are good examples.

Part I: Energy-Related Petroleum Products (ERPP).

Each month, on exhibit 17, the Census Bureau and the Bureau of Economic Analysis present the imports for ERPP. These numbers are not seasonally adjusted (NSA).

To forecast the Petroleum number we need:
1) Price per barrel of crude oil.
2) Quantity of crude oil imported.
3) Price per barrel of "Other" ERPP
4) Quantity of "Other" ERPP.

Total NSA ERPP ($) = P (crude) * Q (crude) + P (other) * Q (other).

CRUDE OIL

To estimate the Crude price and quantity, I'm going to use the reported numbers from the DOE. On sheet "2-TWIP Crude World & US Prices", the DOE provides the weekly contract price back to 1997. On sheet "5-TWIP Crude Imports" the DOE provides the average daily imports, not including SPR. NOTE: Sheet 2 is contract prices, even though it is labeled "spot" prices "United States Spot Price FOB Weighted by Estimated Import Volume (Dollars per Barrel)".

It appears that the contract lengths vary over time, but an 8 week volume weighted average, provides a close approximation of the price. Using this data since Jan '97, this approach usually (2/3 of the time) comes within +/-2% of the Census reported price, although there were two months were it missed by 5%. Still the correlation is very good. Here is the DOE data since Feb 1:

Week	Contract Price ($/BBL)	BBL (1000s/day)
Feb 04, 2005	37.915	9914
Feb 11, 2005	36.575	10434
Feb 18, 2005	38.076	9643
Feb 25, 2005	40.567	10065
Mar 04, 2005	43.377	10099
Mar 11, 2005	45.463	10041
Mar 18, 2005	46.42	10270
Mar 25, 2005	46.969	10568
Apr 01, 2005	45.324	9890
Apr 08, 2005	47.688	9863
Apr 15, 2005	44.23	9718
Apr 22, 2005	43.957	10863
Apr 29, 2005	45.902	10259

NOTE: I didn't try to adjust the week end to match the month end.

Using this approach, the predicted average March price per BBL/crude would be $41.20. This is almost 2% more than the reported price of $41.14. Pretty close. For April, the predicted P(crude) is $45.70.

For the quantity of crude, I used a 4 week average of the DOE's average daily crude imports. Since '97, using this method has resulted in a fairly consistent prediction that is about 4% low per month (a systemic error). So I adjust this number accordingly (divide by .96). The March prediction of Q (crude) would be: 330,812 BBLs. The actual number was 325,979 or about 1.5% less.

For March, the estimate of NSA crude = 330,812 * $41.20/BBL = $13.63 Billion compared to the actual of $13.41 Billion.

For April, the NSA prediction for Crude is: 328,592 * $45.70 = $15.0 Billion.

OTHER ERPP

According to the Census Bureau, Other ERPP includes "the following SITC commodity groupings; crude oil, petroleum preparations, and liquefied propane and butane gas". Since I'm not sure how to build up a price from all these products, I compared the price for Other ERPP to the price for crude (the 8 week moving volume weighted average). Although the relationship varies, using the following is relatively close: P (Other) = P (crude) * 1.15 (or 15% more). Most months fall within a +/- 5% of this price estimate. It probably depends on the mix of products and I couldn't determine any seasonal pattern to the price.

For Q (Other) I plotted the quantity of "other" since Jan '97. There has been a slight steady increase with a seasonal pattern. The best estimate for Other ERRP Quantity is probably the same month for the previous year. Sometimes this lead to a substantial error (20%), and I welcome a better approach.

For March, estimated Q (Other) would have been 100,000. Actual was 94,281. The estimated NSA Other was $41.20 * 1.15 * 100,000 BBL = $4.7 Billion. Actual was $4.5 Billion. The good news is that the larger percentage errors for "Other" are not very important for the overall ERPP.

For April, the NSA Other estimate = $45.70 * 1.15 * 82,000 BBL = $4.3 Billion.

NSA vs. SA

I haven't worked up a Seasonally Adjusted (SA) number yet for April ERPP. However, here are the numbers for Feb and Mar (see Exhibit 9 for SA numbers). It is interesting that NSA for March was $3 Billion more (or 20% more) than February, but SA March was only $0.75 Billion more (4% more) than February.

NOTE: These are IMPORTS only of ERPP. The US also exports ERPP that will have to evaluated too to estimate the total number.

Table numbers in Billions $

MONTH	NSA	Seasonally Adjusted
February	$14.947	$18.163
March	$17.955	$18.913
April	$19.300(est)	To Come

Here is the NSA estimate for April imports:

TOTAL NSA ERPP APRIL IMPORTS = $15.0 Billion (Crude) + $4.3 Billion (Other) = $19.3 Billion

SA to come. Part II will be about China.

by Calculated Risk on 5/19/2005 05:16:00 PM

The May edition of Fortune has the following cover "Real Estate Gold Rush":



UPDATE: Better photo from The Big Picture. The lead article is "Real Estate Frenzy: Riding the Boom".

(a pay article, but the lead paragraphs are free).

Speculation is the key to recognizing any financial bubble. Although the housing market remains incredibly strong, speculation is reaching a fevered pace. Articles (and covers) like this frequently appear at or near the top.



Hat tip to my friend Mish for the cover!

by Calculated Risk on 5/18/2005 11:16:00 PM

Here is a great local story on housing in the D.C. area. From "Real Estate Roulette" by Hillary Howard:

"It's expensive to buy a house. Around the Beltway it's not just expensive -- it's hard. Buyers are routinely offering 10 to 15 percent over the seller’s asking price and they're still not getting the deal. Many buyers are even putting escalation clauses in their offers. And, some of those escalation clauses promise to outbid the highest offer. This is what it's come down to."

Check out some of the audios too - in "How Many Contracts Come In?" one house had 41 contracts!

Part 1: How Hot Is The Market?

Part 2: How Competitive Is It For Buyers?

Part 3: How Many Contracts Come In?

There are six more segments at the WTOPNews site.

by Calculated Risk on 5/18/2005 12:10:00 PM

Edward M. Gramlich resigned today from the Federal Reserve Board of Governors according to a FED press release this morning.

Edward M. Gramlich submitted his resignation Wednesday as a member of the Board of Governors of the Federal Reserve System, effective August 31, 2005. Gramlich, who has been a member of the Board since November 5, 1997, submitted his letter of resignation to President Bush. In view of his impending departure and in keeping with Federal Open Market Committee practice, he will not attend the August 9 meeting of the FOMC.

"Ned has contributed powerfully to the work of the Board and of the FOMC for nearly eight years," said Federal Reserve Board Chairman Alan Greenspan. "Our deliberations have been enriched by his keen insights, his good humor and his lively mind."

Meanwhile, the WaPo is reporting that "Administration Considers Delaying Fed Chief's Exit".

Bush administration officials are mulling whether to encourage Greenspan, 79, to continue as Fed chairman for at least a few months beyond the Jan. 31 expiration of his term, according to sources told of the possibility.

That would give the White House more time to broaden the search for possible successors, looking beyond the academic and policy worlds to the corporate world, as they have been urged to do by some financial analysts.

"More time to broaden the search"? The White House wasn't aware that Greenspan was retiring in January?

UPDATE: New MUST READ Fed Watch by Dr. Tim Duy: Steady as She Goes – In More Ways Than One

by Calculated Risk on 5/17/2005 08:32:00 PM

Here is Mr. Luskin's apology:

I apologize for not properly crediting the original error. Unlike DeLong, I will make an honest correction acknowledging this error. Since you posted to DeLong’s comments board pseudonymously, I had no idea how to find your blog. I Googled the quote and got the one I got. It happens.

Assuming that your post as currently formatted is the same as it was originally, and has not itself been corrected without annotation, then DeLong’s misconstrual of what is Buffett and what is you is all the more egregious. The indentation makes it terribly obvious, and your apologies on DeLong’s message boards seem out of order. It is he who should apologize to you for some combination of misquotation and plagiarism.

-=-=-=-=-
Donald L. Luskin
Chief Investment Officer
Trend Macrolytics

First, give Mr. Luskin credit, he did apologize. Of course, I was only upset at his assertion that "... [CalculatedRisk] added to Buffett's quote, himself making it seem that the words were Buffett's, not his own". I did no such thing, and my immediate attempts to correct Dr. DeLong's blog are evidence of my intention. (NOTE: Luskin got the wrong blogger, I've inserted my blog name)

I appreciate Luskin's caveat concerning whether I changed the format; I didn't. But I can understand how Dr. DeLong misread the post (see it for yourself here) and I intend to change the formatting soon to make a better distinction between quotes and my text.

I left Dr. DeLong two messages (here) See Comment #2. (DeLong sometimes get swamped with comments, so I can understand how he overlooked this one):

Edit: Buffett's comments ended with "I mean the idea that this terrible specter looms over us 20 years out which is a small fraction of the deficit we happily run now seems kind of interesting to me."

The next sentence was my comment. I didn't mean to imply that was from Warren Buffett.

Best Regards!
Posted by: CalculatedRisk | May 6, 2005 07:43 PM

And here (comment #4):

Error correction: Dr. DeLong, a portion of the quote you attribute to Buffett is actually from me.

The Buffett quote should read: "Well, it's an interesting idea that a deficit of $100 billion a year, something, 20 years out, seems to terrify the administration. But the $400 plus billion dollars deficit currently does nothing but draw yawns. I mean the idea that this terrible specter looms over us 20 years out which is a small fraction of the deficit we happily run now seems kind of interesting to me."

SOURCE: http://transcripts.cnn.com/TRANSCRIPTS/0505/04/ldt.01.html


The following sentences were my commentary. I am sorry that my blog wasn't clear.

Excellent letter!
Best Regards.
Posted by: CalculatedRisk | May 12, 2005 10:30 AM

I don't see anything "out of order" with these attempts at correcting an error. Maybe I'm overly polite at times, but maybe others should be more polite and treat simple errors as, well, simple errors.

I disagree with Mr. Luskin's final sentence: "It is he who should apologize to you for some combination of misquotation and plagiarism." First, Luskin made errors in his post; an incorrect link that somehow goes to EBay, and referencing the wrong blogger are two errors. In his apology he states "It happens." I agree - no problem. And the same goes for Dr. DeLong. These are simple mistakes.

If Luskin hadn't claimed I was attempting to pass off my own words as Buffett's, I wouldn't have even asked for an apology.

Further, DeLong didn't misquote me, he accidentally misquoted Buffett after reading my blog. And Luskin's plagiarism comment is absurd: DeLong did not try to pass off my text as his own (the criteria for plagiarism), he accidentally misquoted Buffett.

This is a true tempest in a teapot.

UPDATE: Here is my email response to Mr. Luskin:

Mr. Luskin,

I've posted your response (as promised in my previous post). I appreciate your taking the time to respond.

The errors in your posts didn't bother me. I was only concerned with this comment: "... [CalculatedRisk] added to Buffett's quote, himself making it seem that the words were Buffett's, not his own". (I've corrected the blogger name)

I had no intention of passing off my commentary as Buffett's, and that is why I tried to correct Dr. DeLong's posts. I understand your concern that my formatting might have changed - it hasn't.

Even more important, as a lifelong Republican I'm baffled that our party has abandoned fiscal prudence. Senator Hagel said it well in a 2003 Op-Ed: "I gave my first speech on the Senate floor in February 1997 in support of the balanced-budget amendment. Republicans used to believe in balanced budgets. Republicans used to believe in fiscal responsibility, limited international entanglements and limited government. We have lost our way."

Clearly the General Fund deficit dwarfs any problem with Social Security. Why don't you join with me and help redirect our party to this more serious issue?

Good luck to you.
CR

by Calculated Risk on 5/17/2005 07:17:00 PM

Chris directed me to this site for FDIC owned real estate.

Bargain Properties
--------------------------------------------------------------------------------

There are no sales announcements at this time. Please check back soon.

I wonder what they mean by "soon"?

by Calculated Risk on 5/17/2005 05:08:00 PM

I usually don't read Luskin, but pgl at Angry Bear refers me to these two posts by Don Luskin:

These people are so classy

Democrats misquote each other for fellow Democrats

Here is what actually happened:

1) I wrote a post titled Buffet and FDR on May 4th. I quoted Buffett from his appearance on CNN's Lou Dobbs.

2) On May 6th, Dr. DeLong quoted my blog. However, if you compare my post and Dr. DeLong's, you can see that he missed the delination between Buffett's comments and mine. I left Dr. Delong a comment, but he apparently missed it (see 2nd comment).

3) On May 12, Dr. DeLong blogged his Statement on Social Security Reform. Once again I noted the same error (see comment 4).

Obviously this is just a simple mistake that has been corrected.

But look how Luskin engages in name calling and makes several errors:

1) Luskin attributes the quote to '"musenla" on the De Profundis blog'. Wrong. I am the author.

2) Luskin asserts that "musenla" added the extra text trying to make "it seem that the words were Buffett's, not his own". Not true. The Buffett quote was indented, my comments were not. I did not "intend" to make it appear that those were Buffett's comments. I tried to correct DeLong immediately when I discovered he had misread my post.

Luskin owes me an apology. I will print Luskin's apology when he emails it to me.

3) I am a lifelong Republican and former youth delegate to the RNC. I am getting the feeling that moderate Republicans aren't welcome in the GOP anymore.

by Calculated Risk on 5/16/2005 11:04:00 PM

Speaking to the Australian Business Economists in Sydney tonight (via videoconferencing), Federal Reserve Governor Donald Kohn made several remarks concerning US interest rates:

"We have not yet finished this task," [Kohn] said.

"The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run.

"And if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace."

Further Fed changes to interest rates should induce an increase in the personal savings rate, by increasing a return to saving and dampening the upward momentum in housing prices, Dr Kohn said.

Higher rates would thereby lessen one of the significant spending imbalances in the US economy.

Dr Kohn said there were a number of spending imbalances in the US economy, but that at the most aggregated level there were a large and growing discrepancy between what the US spent and what it produced, as measured by the current account deficit.

"The growing current account deficit has been associated with a pronounced decline in the savings proclivities of the private and public sectors over the last year," he said.

"Households have saved only about one per cent of their after-tax income, and that compares to about eight per cent on average from 1950 to 2000."

Hat tip to The Housing Bubble's Ben Jones for the article.

by Calculated Risk on 5/16/2005 04:32:00 PM

Today, the Office of the Comptroller of the Currency, the FED, the FDIC and other agencies issued a new credit risk management guidance for home equity lending.

UPDATE: See MarketWatch's Rex Nutting: "Lenders warned of home equity risks"
UPDATE2: WaPo: U.S. Warns Lenders To Elevate Standards

In the late '90s, the FED was criticized for not using higher margin requirements as a tool to prick the stock market bubble. Economist Simon Kwan of the San Francisco Federal Reserve Bank argued that using margin requirements as a policy tool would not be effective, because "Investors can use financial derivatives to obtain exposure to equities without owning stocks, and they also can substitute margin credit with other types of credit."

These arguments do not apply to the housing bubble: investors cannot use derivatives to invest in homes, and rarely are other sources of credit sufficient for a home purchase. Today the various agencies have acted and tightened lending requirements, primarily to protect lending institutions, but indirectly to prick the housing bubble.

In the guidance, the agencies point to several "product, risk management, and underwriting risk factors and trends that have attracted scrutiny":

· Interest-only features that require no amortization of principal for a protracted period;

· Limited or no documentation of a borrower’s assets, employment, and income (known as "low doc" or "no doc" lending);

· Higher loan-to-value (LTV) and debt-to- income (DTI) ratios;

· Lower credit risk scores for underwriting home equity loans;

· Greater use of automated valuation models (AVMs) and other collateral evaluation tools for the development of appraisals and evaluations; and

· An increase in the number of transactions generated through a loan broker or other third party.

All of these areas of concern are addressed with tighter lending requirements in the various provisions of the new guideline. These include tighter controls to detect mortgage fraud, better controls on third party originations, more stringent appraisal guidelines and more.

Probably the two most important provisions concern HELOCs (home equity lines of credit) and HLTV (High Loan to Value) loans. With the HLTV loans, the agencies remarked that "in recent examinations, supervisory staff has noted several instances of noncompliance with the supervisory loan-to-value limits ..." In addition to more controls to address this noncompliance, they added a new requirement:

"Loans in excess of the supervisory LTV limits should be identified in the institution's records. The aggregate of high LTV one- to four-family residential loans should not exceed 100 percent of the institution's total capital. Within that limit, high LTV loans for properties other than one- to four-family residential properties should not exceed 30 percent of capital."

Lending institutions that are over or close to the limit of allowable HLTV loans must stop making these types of loans.

For HELOCs, lenders are now advised to consider the borrowers ability to pay over the life of the loan. This is a key difference in lending standards; previously lenders only considers the current interest rate and the borrower's income. Here is the key passage:

"... underwriting standards for interest-only and variable rate HELOCs should include an assessment of the borrower's ability to amortize the fully drawn line over the loan term and to absorb potential increases in interest rates."

The agencies must be very concerned when they caution lending institutions as follows:

"... prudently underwritten home equity loans should include an evaluation of a borrower's capacity to adequately service the debt."

Altogether, this is a clear warning shot across the bow of the housing bubble.

by Calculated Risk on 5/16/2005 03:52:00 PM

From the Federal Reserve today:

Agencies Issue Credit Risk Management Guidance for Home Equity Lending

PDF File: CREDIT RISK MANAGEMENT GUIDANCE FOR HOME EQUITY LENDING

Press Release:

The federal bank, thrift, and credit union regulatory agencies today issued guidance that promotes sound risk management practices for home equity lines of credit and loans. The agencies have found that in some cases credit risk management practices for home equity lending have not kept pace with the product's rapid growth and eased underwriting standards.

The rise in home values, coupled with low interest rates and favorable tax treatment, have made home equity lines of credit and loans attractive to consumers. To date, delinquency and loss rates for home equity portfolios have been low, due at least in part to the modest repayment requirements and relaxed structures of this lending. However, the agencies have identified risk factors that, along with vulnerability to interest rate increases, have attracted scrutiny, including:

Interest-only features that require no amortization of principal for a protracted period;

Limited or no documentation of a borrower's assets, employment and income;
Higher loan-to-value (LTV) and debt-to-income ratios;

Lower credit risk scores for underwriting home equity loans;

Greater use of automated valuation models and other collateral evaluation tools for the development of appraisals and evaluations; and

An increased number of transactions generated through a loan broker or other third party.

The agencies note that active portfolio management is especially important for financial institutions that project or have already experienced significant growth or concentrations in higher risk products, such as high LTV, limited documentation and no documentation interest-only, and third-party generated loans.

Like most other lending activity, home equity lending can be conducted in a safe and sound manner with appropriate risk management systems. This guidance outlines the agencies' expectations for sound underwriting standards and effective credit risk management practices for a financial institution's home equity lending activity.