by Calculated Risk on 7/14/2005 11:47:00 AM

A couple weeks ago on Angry Bear, I quoted Econobrowser's Dr. Hamilton who asked: If there is a housing bubble,

"[W]hy are banks making loans to people who aren't going to be able to pay them back?"

To try to answer Dr. Hamilton's question, I suggested we try to identify who would be left holding the bag and work backwards to motive.

Caroline Baum touches on the same topic in Enough About Loans. What About Lenders?

Forget the borrowers for a minute. Who's making these arguably risky loans? Why are lenders extending credit to seemingly bad credit risks?

One answer is that they aren't taking the risk. Rather, the risk is spread out, diluted. Lenders sell the loans, or the loans are securitized, in which case investors assume the risk.

As Federal Reserve Chairman Alan Greenspan reiterates, highly efficient capital markets in the U.S. diversify the risk, transferring it from those who don't want it to those who do.

Still, ``someone is taking on a lot of risk for someone to be able to take on less risk,'' [Michael Carliner, an economist at the National Association of Homebuilders in Washington] says.

Spreading the Risk

Then there's the question of whether risk is being priced correctly.

``There's been a dramatic explosion in lending to people with poorer credit-management history, and not a lot of history how certain loan products will perform,'' says Doug Duncan, chief economist at the Mortgage Bankers Association in Washington. ``We have no experience in 10-year interest-only mortgages.''

The risks apply to all parties in the transaction, Duncan says.

``For the borrower, did he understand how the loan would change?'' he says. For the servicer of the mortgage, ``did he understand how the loan would perform? Would it pre-pay faster, go delinquent? For the investor, did it achieve the yield expectations?''

OK, so the risk is spread out among various parties. Still, banks and thrifts do hold loans, especially ARMs, Duncan says. Won't they get stuck if the value of the house goes down, the borrower defaults and the lender can't recoup what was owed -- multiplied many times over?

But this still doesn't identify the bagholders. Fannie Mae? Hedge Funds? Are investors underestimating the risk? Just more questions ...

by Calculated Risk on 7/14/2005 01:24:00 AM

Two months ago I started to build a simple model to project the trade deficit. I didn't make as much progress as I had hoped, but the first two components (oil and China) have performed reasonably well for two months..

First, I projected the oil trade balance. And then I projected the trade deficit with China.

My model projected a deficit of $15.5 Billion Seasonally Adjusted in energy related petroleum product imports. The actual number was $15.8 Billion (see Exhibit 9). This is an error of just under 2%.

For the trade balance with China, my model projected a deficit of $15.5B NSA (SA is not available). The actual number (see Exhibit 14) was $15.7B or an error of 1.2%.

Here are each of the components and how the model performed:

ITEM	Projection	Actual	Error
US Exports to China (NSA)	$3.4B	$3.3B	3%
US Imports from China (NSA)	$18.9B	$19.05B	<1%
US Trade Deficit: China (NSA)	$15.5B	$15.75B	1.6%
Oil: Imports SA	$17.4B	$18.1B	3.9%
Oil: Exports SA	$1.9B	$2.3B	17%
OIL Balance SA	$15.5B	$15.8B	2%

Some internal data:

ITEM	Projection	Actual	Error
Oil: Contract Price BBL	$42.88	$43.08	<1%
Oil: BBLs Crude	337.9M	318.6M	6%
Oil: Price Other BBL	$49.31	$48.99	<1%
Oil: BBLs Other	85M	99.7M	15%
Oil: Oil Imports NSA	$18.7B	$18.6B	<1%

It appears my SA factor for oil imports was somewhat off the mark. I'll have to take another look at that step. There is much more to do!

by Calculated Risk on 7/13/2005 08:33:00 AM

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis released the monthly trade balance report today for May:

"... total May exports of $106.9 billion and imports of $162.2 billion resulted in a goods and services deficit of $55.3 billion, $1.6 billion less than the $56.9 billion in April, revised.

May exports were $0.2 billion more than April exports of $106.7 billion.

May imports were $1.4 billion less than April imports of $163.6 billion."

Note: all numbers are seasonally adjusted.


Click on graph for larger image.

UPDATE: fixed a couple of errors.
MayJune 2005 was only slightly14% worse than May 2004. For the first five months of 2005, the trade deficits is up 20% over the same period in 2004.

The average contract price for oil dropped from a record $44.76 per barrel in April to $43.08 in May. The temporary drop in oil prices lowered the impact of oil on the trade deficit for May. However, the June trade deficit will be impacted by record high oil prices again.

I think the deficit will start to expand again starting in June.

by Calculated Risk on 7/12/2005 06:39:00 PM

Once again, I've only modeled Oil and China, although I've added exports for Oil. Hopefully I will add more in the future. Here is a review of last month's predictions.

PROJECTIONS:
I: For petroleum, I project that NSA petroleum trade imports will be $18.7 Billion, down from $18.9 Billion in April. Including petroleum exports and adjusting for seasonal effects, the SA oil balance for May is projected at $15.5 Billion. This compares to $17.2 Billion for April.

II: For China, I project (see bottom) a NSA deficit of $15.5 Billion for May compared to $14.7 Billion in April. SA this is $16.1 Billion vs. $15.5 Billion for April.

III. OVERALL: I haven't developed a method for predicting the deficit for other countries, but based on Oil and China I think the deficit in May might improve slightly from April's deficit of $57 Billion. Oil will be about $1.7 Billion less in May (than April) and China approximately $0.6 Billion more.

My Guess (not enough work to call it a projection / estimate): $56.5 Billion Deficit.

NOTE: I expect June to be significantly worse than May.


CHINA: The following is the estimate for trade with China based on this methodology.

CHINA TRADE BALANCE: Table numbers in Billions $

NOT SEASONALLY ADJUSTED

MONTH	NSA Balance	NSA Exports	NSA Imports
February	-$13.9	$3.08	$16.95
March	-$12.9	$3.3	$16.21
April	-$14.7	$3.4	$18.12
May	-$15.5(est)	$3.4(est)	$18.9(est)

SEASONALLY ADJUSTED (all estimates)

MONTH	SA Balance	SA Exports	SA Imports
February	-$18.1	$3.08	$21.19
March	-$15.1	$3.3	$18.42
April	-$15.5	$3.4	$18.88
May	-$16.1(est)	$3.4(est)	$19.5(est)

by Calculated Risk on 7/12/2005 11:27:00 AM

Ben Bernanke gave his first speech this morning as the new chairman of the White House's Council of Economic Advisers. At the American Enterprise Institute, Bernanke commented on housing:

"While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom,"

I disagree. Speculation, including excessive leverage, appears rampant in many markets.

Those fundamentals, Bernanke said, include low mortgage rates, rising employment and incomes, a growing population and a limited supply of homes or land in some areas.

"For example, states exhibiting higher rates of job growth also tend to have experienced greater appreciation in house prices,"

I disagree. Low mortgage rates are not a housing "fundamental", employment in California (one of the hottest real estate markets) is struggling, and population growth / limited supply of land was true 10 years ago too when housing was in a bust.

"The administration will continue to monitor" developments in the housing market, Bernanke said. "However, our best defenses against potential problems in housing markets are vigilant lenders and banking regulators, together with perspective and good sense on the part of borrowers."

And on the budget deficit:

"One consequence of the strong income growth we are enjoying is higher-than-expected levels of tax collections so far this year which, if maintained with spending controls, will reduce the government's budget deficit for this year well below its projected level,"

This is laughable. There is a small improvement in the deficit this year, due to one time events, but next year will be worse.

As the Chairman of the CEA, it is understandable that Bernanke supports the Bush Administration's positions.