by Calculated Risk on 1/20/2010 10:56:00 PM

Supposedly a return to the "spirit of Glass Steagall" ...

From the WSJ: Obama to Propose New Limits on Banks (ht MrM)

President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country's biggest banks ...

From Bloomberg: Obama to Propose New Financial Rules On Proprietary Trading

Obama, who is meeting tomorrow with former Federal Reserve Chairman Paul Volcker, will propose the new rules as a part of an overhaul of financial regulations to help limit the size of financial institutions ...

This sounds like a Volcker like approach to regulating the largest banks.

by Calculated Risk on 1/20/2010 09:36:00 PM

From Bloomberg: China Accelerates to 10.7% Growth Pace as Bubble Dangers Loom

Gross domestic product rose 10.7 percent from the same period a year ago ... a statistics bureau report showed in Beijing today.

The focus for China’s policy makers has now shifted to restraining the inflationary pressures that stem from their success in spurring a rebound. ...

The economy’s third straight quarterly acceleration highlights the risk that inflation may surge and asset bubbles form after monetary policy committee member Fan Gang said in November that growth of more than 10 percent is excessive.

Note that the headline number is the increase from Q4 2008 to Q4 2009 - as opposed to the annualized quarterly growth rate reported in the U.S.

And on the possibility of asset bubbles, from China Economic Review: Shanghai mortgages rise 1,600% in 2009 (ht Brian)

Banks lent out US$14.58 billion in new mortgages in Shanghai in 2009, a 1,600% increase from the previous year, the South China Morning Post reported. Of the total, US$5.7 billion went to buyers of new properties and US$8.88 billion to those buying second-hand properties, according to the People's Bank of China. Average prices of Shanghai homes rose 68% from 2008.

by Calculated Risk on 1/20/2010 06:13:00 PM

The following two graphs are updates from previous posts with the housing start data released this morning.

The following graph shows total housing starts and the percent vacant housing units (owner and rental) in the U.S. Note: this is a combined vacancy rate based on the Census Bureau vacancy rates for owner occupied and rental housing through Q3 2009 (Q4 will be released in early February).

Click on graph for larger image in new window.

It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units.

The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Also some hidden inventory (like some 2nd homes) have become available for sale or for rent, and lately some households have probably doubled up because of tough economic times.

The second graph shows single family housing starts and unemployment (inverted). (The first graph shows total housing starts)

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

This suggests unemployment might peak in Summer 2010 since housing starts bottomed in April 2009. However, since I expect the housing recovery to be sluggish, I also expect unemployment to remain high throughout 2010 (I think double digits throughout 2010 is very likely without additional job related stimulus).

Until the large overhang of vacant housing is reduced, a significant rebound in housing starts is also very unlikely.

by Calculated Risk on 1/20/2010 04:00:00 PM

Here is a discussion of interest rate risk on the Wells Fargo conference call today (ht Brian):

Analyst: just a follow-up question on rates. I just wanted to understand, Howard, how you are thinking about the impact of the Fed exit on the fixed-income market and how you are planning on managing the balance sheet for that?

Howard Atkins, Wells CFO: Well, that is a good question, Betsy, and the Fed obviously is active in buying MBS. And despite the fact that the yield curve is as positively sloped as it is right now, their active purchases is a factor that is, in some senses, artificially keeping long MBS yields lower than they might otherwise be. At some point presumably, they will either gradually or more quickly reverse course and that could lead to an increase in mortgage interest rates. And as I mentioned a couple of times in my remarks, in possible preparation for that, we have been keeping our powder dry, in effect underinvesting this large base of core deposits that we have for the possibility that that reverses course.

Analyst: So you might get some OCI hit near term, but dry powder leads you to a better outlook for earnings, is that the way to think about it?

Atkins: Yes, again, while the mortgage business is showing good results right now, in effect, on the portfolio side, the investment portfolio, we, in effect, are giving up some current income. We don't believe in the carry trade and we do want to preserve some powder in case rates do go up and we'll have the powder at that point, we will invest the powder at that point to offset some -- whatever is going on in the mortgage business.

John Stumpf, CEO: I see this as the classic short-term view of the business and long-term view of the business. 400 basis points or something like that, which you make in the carry trade today is very attractive. But we think it is the wrong decision long term because we think the bias is for higher rates, not for lower rates and we are willing to wait for that to happen. We think that is the better trade.

Atkins: we are effectively giving up 400 basis points today for possibly a year or so, maybe plus or minus, to avoid the potential risk of a larger number of basis points for 30 years. So the last thing we want to do is get stuck with securities at these low levels of interest rates.

Stumpf: Because I think when rates move, they are probably going to move at some speed and I don't think it's going to be maybe a quarter. It could be more than that and it could happen relatively quickly.

Atkins: this is the same thing that we did back in 2002, 2003 when interest rates were also at cyclical low points just before they went up a lot. What we are doing now is not very different from the way the Company has always managed itself.

So they are keeping their "powder dry", expecting an increase in rates. Many other banks are getting healthy on the carry trade ...

by Calculated Risk on 1/20/2010 02:25:00 PM

With oil prices near $80 per barrel, I've started looking for signs of demand destruction (see: Oil Prices Push Above $81 per Barrel). One of the key signs in early 2008, was the sharp drop in miles driven in the U.S.

So far miles driven (through November) are up slightly year-over-year. The Department of Transportation (DOT) reports:

Travel on all roads and streets changed by +1.4% (3.2 billion vehicle miles) for November 2009 as compared with November 2008. ... Cumulative Travel for 2009 changed by +0.3% (7.6 billion vehicle miles).

Click on graph for larger image in new window.

The first graph shows the rolling 12 month of U.S. vehicles miles driven.

By this measure (used to remove seasonality) vehicle miles declined sharply in 2008, and have been increasing slowly in recent months.

The second graph shows the comparison of month to the same month in the previous year as reported by the DOT.

As the DOT noted, miles driven in November 2009 were 1.4% greater than in November 2008, however miles driven are still down 3.9% compared to November 2007.

So far miles driven is not showing any evidence of demand destruction for oil, but the slow increase in miles is suggesting a sluggish recovery.