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EJ
08-11-06, 09:26 AM
Economy Often Defies Soft Landing (http://www.nytimes.com/2006/08/11/business/11econ.html?ref=business)
August 11, 2006 (New Your Times) Free Registration Required

In the cool and quiet marble corridors of the Federal Reserve, the strategy for taming inflation sounds painless, even soothing: a “soft landing” for the economy after several years of flying high.

As the central bank contended on Tuesday, when it decided to pause in its two-year effort to raise interest rates, inflation is “elevated” right now but will begin to decline because economic growth is poised for a modest slowdown.

Many economists, though, warn that the soft landing may seem anything but soft, and suggest that the Fed is either too rosy about the looming slowdown or naïve about the difficulty of reaching its goal for inflation.

In practice, the Fed has achieved only one true soft landing — in 1994-95, when, under the leadership of Alan Greenspan, it was able to slow the economy enough to cool spending and ease inflation pressure but not so much as to cause a big jump in unemployment. But even Mr. Greenspan, whose ability to fine-tune policy made him famous, presided over two formal recessions, in 1991 and in 2001.

AntiSpin: We all know that cheap imports from China have for years balanced out rapid inflation in the prices of non-traded goods and services -- energy, healthcare, insurance, and education -- to give us the magic low numbers we get out of the Bureau of Labored Statistics, that group of government number collectors and crunchers that iTulipers hold in low esteem (http://www.itulip.com/cgi-bin/vote.cgi?view=1155054263). If the BLS used the same method of accounting to generate the CPI as was used before it was tortured into its current shape during the Clinton administration, CPI inflation is currently running at around 7.5% annually versus the 4.3% reported in by the BLS.


http://www.shadowstats.com/imgs/chartSGS01-17.gif


CPI validity arguments aside, if the major counter-balance of non-traded goods and services inflation is cheap goods imports from China, then they'd better stay cheap or even the BLS isn't going to be able to hide the resulting rise in CPI.

Assuming relatively stable currency exchange rates between the Chinese RMB and the US dollar, labor and land prices are the major factors keeping Chinese products cheap. This recent article from Supply Chain Digest (http://www.scdigest.com/assets/NewsViews/06-08-09-1.cfm) delivers some unwelcome news:
The News: After many years of rapid growth, foreign direct investment in China has slowed dramatically.

The Impact: Rising costs of land and labor are diminishing China’s manufacturing cost advantages. Interest and activity in Vietnam, Malaysia and other lower cost countries is showing a corresponding increase.

The Story: After a sharp decrease in June, direct foreign investment in China is down for the first half of 2006, a sign that many experts think is driven in part by rapid increases in the cost of labor and land in China, especially in the coastal regions.
To a certain extent, other Asian countries with lower labor costs than China's, such as Malaysia and Vietnam, will pick up the slack, and we'll see more products in the shelves from these countries. But in the long term the US can expect that as living standards increase among goods exporting countries, labor costs will rise and the anti-inflation free ride in the US has enjoyed will gradually come to an end, ushering in an era of higher inflation and interest rates and slower economic growth.

If the Fed counters this inflation with monetary policy with gradual rate increases, the US economy will likely experience a series of relatively minor recessions that adjust the economy to reach a lower level of demand. If the Fed does not, the current stagflationary environment will drag on, riding the edge of recession while inflation continues to build, requiring more agressive rate hikes that will cause a more severe recession. In either case, the NYTimes story is correct, recession is in the offing, and all of these longer term trends will be overshadowed by the impact of the collapsing housing bubble (http://www.itulip.com/forums/showthread.php?t=312).

jk
08-11-06, 10:25 AM
below are 2 graphs from contraryinvestor.com

the first raises the spectre of banking system instability in the event of a housing collapse. even in the absence of mortgage defaults, the banks have become reliant on real estate loans for their profits, especially because they've been disintermediated by large corporations going directly to the capital markets.

the second chart shows the degree to which a collapse in residential real estate lending may be ameliorated by increases in lending for commercial real estate. but in a slowdown/recession commercial construction is likely to slow markedly.

jk
08-11-06, 01:19 PM
Charts deleted

Jim Nickerson
08-11-06, 01:24 PM
No, just get two pop ups asking for password to sign on at contrary investor.

Alfredo Dominguez
08-11-06, 03:28 PM
If they aren't copyrighted or if CI gives you permission, you should download and post them after signing up for an account at this website: http://www.photobucket.com/

EJ
08-11-06, 05:14 PM
Guys, please don't post charts and images from the subscrption areas of other web sites, especially while Fred is on vacation as yours truly ain't so good at fixing this stuff. Thanks.
EJ

jk
08-12-06, 11:30 AM
below are 2 graphs from contraryinvestor.com

the first raises the spectre of banking system instability in the event of a housing collapse. even in the absence of mortgage defaults, the banks have become reliant on real estate loans for their profits, especially because they've been disintermediated by large corporations going directly to the capital markets.

the second chart shows the degree to which a collapse in residential real estate lending may be ameliorated by increases in lending for commercial real estate. but in a slowdown/recession commercial construction is likely to slow markedly.
here are url's for the images, copyright contraryinvestor.com

IMAGE 1
http://i89.photobucket.com/albums/k216/jklugmn/image1.png
if that doesn't work try
http://i89.photobucket.com/albums/k216/jklugmn/image1.png


IMAGE 2

http://i89.photobucket.com/albums/k216/jklugmn/image2.png
if that doesn't work try http://i89.photobucket.com/albums/k216/jklugmn/image2.png

metalman
08-12-06, 12:04 PM
here are url's for the images, copyright contraryinvestor.com



we can't count on commercial real estate lending to pick up the slack. The fed has plans to funnel the money someplace. but where?

THE FED OFFICIALLY KICKS OFF THE NEXT RECESSION

Friday, March 31, 2006

It is official. A recession is coming. How do I know? Because over the past several weeks new Fed Chairman Ben Bernanke gave an official warning to bankers about commercial real estate loans. That is always the kickoff to a recession. It is the starter’s gun, the national anthem before a ballgame, the opening hymn at a church service. Here is how it works.

http://www.freemarketnews.com/Analysis/208/4345/2006-03-31.asp?wid=208&nid=4345

jk
08-12-06, 12:26 PM
we can't count on commercial real estate lending to pick up the slack. The fed has plans to funnel the money someplace. but where?

THE FED OFFICIALLY KICKS OFF THE NEXT RECESSION

Friday, March 31, 2006

It is official. A recession is coming. How do I know? Because over the past several weeks new Fed Chairman Ben Bernanke gave an official warning to bankers about commercial real estate loans. That is always the kickoff to a recession. It is the starter’s gun, the national anthem before a ballgame, the opening hymn at a church service. Here is how it works.

http://www.freemarketnews.com/Analysis/208/4345/2006-03-31.asp?wid=208&nid=4345

really interesting link, metalman. thanks. so it seems commercial real estate won't help the banks. so how is m3 expanding so much? [last we knew] the fed is buying something. what does the fed buy? tbills in the form of repos. so the fed is directly liquifying the banks by buying their tbills. i wish i understood this stuff more than i do. i would assume that the banks would only engage in such transactions if they made money on it, implying that the fed is buying at a premium. they are helping the banks make more on their tbill portfolio than would otherwise be the case. in a rising interest rate environment, this would make sense. if banks parked some money in short treasuries in jan, say, and the fed raised rates a couple of months later, those treasuries just got a tad cheaper. the fed can top up the rate of return via its open market operations.

so when you ask, "where is the fed putting the money?" my tentative answer would be keeping banks liquid and profitable even while [formerly] tightening.

this thinking is all very tentative because, as i say, i really don't know much about these processes. perhaps someone more educated about money-market/fed processes could chime in?

jk
08-12-06, 09:19 PM
on where the money might go, courtesy of doug noland's credit bubble bulletin at prudentbear.com



Recalling how the bursting technology Bubble welcomed the emerging housing finance Bubble, it is today imperative to remain cognizant of the fledgling Bubbles waiting to be over-financed at home and abroad. The expansive “energy/energy-related” super-sector is primed for unprecedented investment, spending, speculation, waste and fraud. There are, as well, intense Inflationary Biases throughout global finance, bolstered by a confluence of massive trade imbalances (foremost the U.S. Current Account Deficits), energized Credit systems across the globe, the ongoing Chinese/Indian/Asian boom, frenetic worldwide M&A activity, frenzied leveraged speculator community activity, and the swelling liquidity being accumulated by the oil exporting economies. And as much as the Fed expects inflation to abate, the bottom line is it's a fact of economic life (and history) that inflationary pressures have a stronger propensity to amplify and broaden than they do to dissipate.

EJ
08-12-06, 10:25 PM
on where the money might go, courtesy of doug noland's credit bubble bulletin at prudentbear.com

"Printing press" is really the wrong concept, today. Or in the 1920s. In both cases, a new credit machine had evolved to get around the controls imposed by regulators following the collapse of the previous credit system. No one really understood how it worked, and once turned on, no one knew how to control it. Likewise today. It's out of control. Projecting the appearance of official control is imperative. But don't believe it.