Tuesday, July 29, 2008

From the Wall Street Journal: Fannie Mayhem: A History

Look Past GDP To Judge If the Economy Is In Recession

In the Wall Street Journal, Sudeep Reddy, ("Economists Weigh Possibility of a Recession Amid Economic Growth" July 28, 2008; page a3) reports that the profession perceives that GDP will not be the sole, decisive factor as to whether the U.S. economy is in recession. Some commentators consider a recession to be synonymous with a decline in GDP. That confuses a metric with the phenomenon you seek to measure.

Speaking with the National Bureau of Economic Research's Dating Committee (the folks who make the call), Mr. Reddy learns a much richer analysis is needed: Victor Zarnowitz is the world's leading authority on the business cycle and a committee member. Zarnowitz "says the downturn in the job market 'is not alone enough, but it already tilts the weight toward a recession.' Mr. Zarnowitz, an economist at the Conference Board, a research group, [and] who has been with the NBER since 1952, says a decline in GDP would give him 'considerably more confidence that the whole thing is in decline.'"

Sudeep Reddy further reports that, "Harvard professor Martin Feldstein, president of the NBER until this month, says the nation has been 'sliding into a recession' since January, when many monthly statistics peaked. But a GDP decline isn't necessary 'if there is enough other evidence that the economy is contracting.'"

Monday, July 21, 2008

Hubbard Says The Fed Is Overextended: Amen Brother Economist

We're Asking Too Much of the Fed

By R. GLENN HUBBARD
July 21, 2008; Page A13

"The combination of eye-popping headline inflation of 5% year over year and dramatic expansions of the Federal Reserve's lending activities to limit the credit crunch raise a key question: Are we asking too much of monetary policy?

"The simple answer is yes. The expansion of the Fed's lending has been extraordinary in scale and scope. But it is not the best response to the present credit crunch, and may bring unwelcome side effects."

Read On....

Wednesday, July 16, 2008

Inflation Hit 5% in May

These are numbers Ben Bernanke and his colleagues at the Fed can not ignore. Inflation is sucking out purchasing power from the economy faster than any stimulus can add it back. The way to fight the recession is to stop inflation now.

Wichita Is Faring Better Than the U.S.

Jerry Siebenmark reports the consensus that our local economy is sailing in a sheltered bay while the national economy struggles to stay afloat in a tempest.

"While high gasoline and food prices are having an effect on the area's economy, they are not dramatically slowing it, local economists said Tuesday.

"'Our local economy, for the most part, is doing very well,' said Malcolm Harris, professor of finance at Friends University. 'Aerospace is doing very well, the farm economy is doing well and natural resources -- oil and gas -- is doing very well.'"


Our local unemployment rate is 1.2 percentage points below the national average.

The ECB's Monetary Policy Is Tighter But the Eurozone's Inflation Is About As Bad as Ours.

Elga Bartsch and Joachim Fels, managing directors at Morgan Stanley, wrote in yesterday's Wall Street Journal: "The main driver behind rising global inflation pressures is well understood: a very lax global monetary policy stance, particularly in the U.S. and in many emerging-market countries. This has fueled higher food and energy prices, and other prices are likely to follow – especially as most central banks around the world are unlikely to tighten policy sharply anytime soon.

"So it is not surprising that inflation is rising everywhere. What does appear puzzling is that, at 4%, euro-area inflation is at about the same level as that in the U.S. and has actually risen by a greater amount over the past year. That's despite a significant appreciation of the euro against the dollar during the same period."

The solution they suggest may be microeconomic rather than macroeconomic: structural reform.

Monday, July 14, 2008

Wichita: median sale price of existing homes was $114,900 in 2007

The median sale price of existing homes reached an all-time Wichita high, $114,900, but the number of houses sold is down by 19.8%.

Maybe the reason home sales are down is that there is a shortage in the price range buyers are looking for. Wayne Short, a former head of the Wichita Area Association of Realtors, provides a breakdown of Wichita's May home inventories by price range. While there are over four months supply of of houses under $100,00 and nine and a quarters months supply of houses between a quarter million and a half million, there were only 3.16 months supply of houses in the $100,000 to $150,000 range. You can find the data in the July 12th posting on his blog.

Builders make their fattest margins from fancier houses, but there might be some money to be made on new houses for ordinary folk.

Thursday, July 10, 2008

The IMF to the U.S. and the Other Top Economic Powers: Inflation Must Be Your Chief Concern

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF) told the leaders of the Group of Eight (G8) July 9 in Hokkaido, Japan that inflation should be the top concern of policymakers confronted by higher food and fuel prices.

The Fed's Inflation Is Driving Wichita's Raw Materials Costs Up

Dan Voorhis reports in the Eagle that "The skyrocketing cost of commodities is putting the squeeze on many Wichita-area manufacturers and wholesalers.

"The leading commodity indexes have risen between 45 and 55 percent in the past 12 months.

"Commodities are raw materials -- such as oil, aluminum, wheat and lumber -- that make up everything consumers buy."


According to Ken Vandruff in the Wichita Business Journal, "Airxcel manufactures air conditioning and heating equipment for recreational vehicles, schools and the telecommunications industry." To produce RV air conditioners, as does Wichita's Airxcel, you need to buy aluminum, steel, and other raw materials. Aluminum prices are up 18% over a year ago. Dan Voorhis quotes "Gary O'Neal, division manager for Central Plains Steel in Wichita," to the effect that hot rolled steel is up 80%.

I am quoted as placing the blame on the worldwide inflation set off by the over expansion of dollar denominated credit. What the ten wisemen at the Fed seem to have forgotten in their haste to deal with the credit crunch is that a general inflation first shows up in commodity prices. Moreover in the three rounds of accelerating inflation Americans suffered through during the Great Inflation of the 1970s, food price inflation was a leading indicator of general inflation. Our own regional Federal Reserve Bank of Kansas City president, Thomas M. Hoenig, has frequently been an inflation hawk, but he rotated off voting membership on the Federal Open Market Committee in January.

-Malcolm C. Harris, Sr., Professor of Finance, Friends University

Wednesday, July 09, 2008

John Marks Templeton: RIP

In today's Wall Street Journal's Outlook and Review we read his obituary:

Maximum Optimist
July 9, 2008; Page A14


On the eve of World War II, John Templeton bought stock in 104 companies selling at $1 a share or less. Only a few turned out to be worthless, while in time the rest turned large profits. Templeton went on to become one of the world's great fund managers by investing at what he called "points of maximum pessimism."

Yet Templeton, who died yesterday at age 95, was never himself a pessimist. As an investor, he always had confidence his picks would improve over the long term. Appropriately, the same "enthusiasm for progress," as he put it, also made him one of the world's great philanthropists. Life's spiritual dimensions were his abiding inspiration.

In 1972 he founded the Templeton Prize, which recognizes achievement that enriches religious experience. Templeton was unhappy that the Nobel Prize excluded faith, so he ensured the honor always had a higher cash prize (now about $1.6 million). Mother Teresa was the first recipient; others include Aleksandr Solzhenitsyn, Michael Novak and in recent years a distinguished roster of physicists and philosophers. A devout Presbyterian, Templeton believed "that God is vastly greater than human beings can comprehend," and sought to use his wealth to help reconcile science and religion. He thought that the one deepened the other.

To that end, he established the Templeton Foundation, which supports academic research in fields like cognitive science and evolutionary biology, as well as work related to the origin and nature of spirituality. Templeton also knew that many such modern philanthropies tend to begin with good intentions and then slide away from donor intent, so he established multiple checks to ensure that his financial legacy will stay true to his vision long after he was gone.

The Templeton Foundation now has a $1.5 billion endowment and awards some $70 million every year. He was indeed an optimistic investor for the long term.

Monday, July 07, 2008

The ECB Has Focus

The European Central Bank (the ECB) has one focus in its mandate, inflation. It takes that single mandate seriously. While the U.S. Federal Reserve drove the federal funds rate to 2% two hundred and twenty basis points below the U.S. inflation rate, the ECB has raised rates. The ECB's policy rate is now at 4.25%. Here the Wall Street Journal's Joellen Perry questions Jean-Claude Tichet, the ECB President.

Read her article here.

Friday, July 04, 2008

There are signs of a Downturn in Europe

The European edition of the Wall Street Journal reports that Denmark is in economic recession and the whole euro zone is in danger of following the Danes.

Emma Charlton and Joel Sherwood report "The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction.

"Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the United Kingdom and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag."

Unlike our Fed, who is fighting the U.S. recession with the wrong weapon, The European Central Bank (the ECB) is raising rates.

A $64 Billion Dollar Beer?


Robert Mugabe has long been an embarrassment to Africa. He has built a totalitarian regime on the crudest thuggery. Now he is committing economic crimes against humanity. Zimbabwe's hyperinflation is, to the extent it is measurable, running at a million percent, according to David Gaffin on Marketbeat. The picture on the right shows how many bank notes are needed to buy one bottle of beer. But that was a few days ago, prices change minute to minute.

Supplying paper to print the currency has been a lucrative business for a Bavarian company, Giesecke & Devrient. The Wall Street Journal describes it as "a secretive, family-owned Bavarian company that once made its money churning out worthless cash for the doomed Weimar Republic in the 1920s." Giesecke & Devrient "has been airlifting tons of blank notes to the Zimbabwean capital Harare. The company, which has been doing business with the African nation since before Mr. Mugabe took power in 1980, is one of the few sources in the world for the specialized paper that is so important in an age when computers and laser printers have made forgery easy."

What is Zimbabwe's fiscal policy? It is the same as its monetary policy: have paper will print! However that may end. Under pressure from the German government, Giesecke & Devrienthas stopped supplying Mugabe. Will the Chinese now supply his printing presses?

Thursday, July 03, 2008

The Latest Employment Report Confirms we Are in A Recession


The graph shows the trend in the percent of American adults who have jobs. Click on the graph to enlarge it.

The Bureau of Labor Statistics issued a employment report this morning that confirmed the national economy is in recession. In June, the Bureau's survey of firms showed them with 61,000 fewer jobs. The national unemployment rate held steady at 5.5%, which is 1.2 percentage points higher than in March, 2007. The most recent data for Wichita shows our unemployment rate (3.5%) two whole percentage points below the national average.

Anita Elberse Finds that the Long Tail is Not Blossoming in the New Economy

Anita Elberse teaches marketing at Harvard Business School. She finds that the "long tail," that Carl Anderson predicted would blossom in an internet world isn't. Her article appears in the Harvard Business Review and a summary can be read on Harvrd Business.