Greenspan (Greenscum) says global economy faces asset price fall

This is the same guy who doesn't know a bubble when he sees one, until after it has burst. Now he's out there flapping his lips about how everything is grossly overvalued. But of course he doesn't talk about the role he and his central banker buddies have played in creating the mess we are in.

Global economy faces asset price fall-Greenspan
Tue Apr 11, 2006 11:41 PM ET

SEOUL, April 12 (Reuters) - Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.

Greenspan, speaking to a financial conference in Seoul via satellite, also said separately that a U.S. law on corporate governance may have influenced some foreign companies to seek initial public offerings outside the United States.

He said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.

"A good part of this expansion is a direct function of the decline in real equity premiums," Greenspan said. "That cannot go on indefinitely."

He said asset prices would begin to fall, but did not predict when that would happen.

"I am reasonably certain that what we are looking at today is an abnormal situation," he said.

Greenspan also said the Sarbanes-Oxley corporate governance act in the United States was a definite advance in terms of corporate governance, but some sections created too many burdens for corporations.

"The Sarbanes-Oxley act has created significant problems for foreign investors with its regulatory structure," he said.

"I am nevertheless acutely aware and disturbed by the fact that initial public offerings have moved away from the U.S. -- and to a large extent have moved to London," he added.

South Korean retailer Lotte Shopping Co. (023530.KS: Quote, Profile, Research) listed in Seoul and London early this year in the world's largest retail IPO, partly because of heavy reporting requirements for U.S. listings.

The former Fed chairman, who stepped down earlier this year, said his impression was that there would be changes in the act.

The Sarbanes-Oxley law was passed by Congress amid accounting schemes that resulted in the collapse of energy trader Enron and telecommunications giant WorldCom.

Asked whether he thought there was "irrational exuberance" in markets today, Greenspan said: "I would hesitate to use it in today's context. Irrational exuberance, I think would be a stretch at this point."

He had previously used the term to suggest signs of a bubble emerging in financial markets in the late 1990s.

The Housing Market has reached a plateau

4/12/2006

Home sales should generally level out and remain at historically high levels, according to the National Association of Realtors.

David Lereah, the NAR's chief economist, says mortgage interest rates are trending up but will remain favorable. "Economic growth and job creation are providing a favorable backdrop for the housing market, but rising interest rates have an offsetting effect," Lereah said.

"Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau, meaning this will be the third strongest year on record." He expects the 30-year fixed-rate mortgage to rise to 6.9 percent by the end of the year.

Growth in the U.S. gross domestic product is forecast at 3.7 percent in 2006, while the unemployment rate should average 4.8 percent.

Existing-home sales are projected to drop 6.0 percent to 6.65 million this year from a record 7.08 million in 2005. New-home sales are likely fall 10.9 percent to 1.14 million from the record 1.28 million last year - both sectors would see the third best year following 2005 and 2004. Housing starts are forecast at 2.00 million in 2006, which is 3.2 percent below the 2.07 million in total starts last year.

NAR President Thomas M. Stevens from Vienna, Va., says home prices are expected to cool, but not as much as in earlier projections. "Although housing inventories have been improving, the balance is still a bit more favorable for sellers and annual appreciation remains in double-digit territory," said Stevens, senior vice president of NRT Inc. "Even so, the market is in a process of normalization - appreciation will return to normal single-digit patterns, providing solid investment returns into the future."

Remember that statement about reaching the plateau. It's a dead ringer for another statement about a stock plateau in 1929.

Dollar is Now a Faith-Based Currency

Gee, doesn't that make you feel so much better about the fate of the US dollar?

DALLAS, April 11 (Reuters) - The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the U.S. dollar, Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

Alluding to the Fed's dual role of ensuring inflation doesn't "raise its ugly head" while still promoting the fastest possible noninflationary growth, Fisher said, "We seek to get it right. And the answer to your question is we will do what gets it right."

Answering audience questions after a speech to the Dallas Friday Group, Fisher said the U.S. dollar is a "faith-based currency" dependent on the credibility of a central bank.

"In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity. As far as my involvement is concerned, I will spend every ounce of energy doing that. I have no doubt that my colleagues will do exactly the same," Fisher said.

Fed sees nothing but blue skies.

According to Fed Jeffrey Lacker, president of the Richmond Federal Reserve Bank, April 4, 2006:

"It has now become uncontroversial to say that the outlook for overall economic activity is quite healthy," Lacker said. Although there will be some moderation in the housing sector this year, this "will not pose a problem for overall activity this year or next...Both survey data and the market prices of inflation-protected Treasury securities tell us that the public expects inflation to continue to be contained. I am confident that we at the Fed have the knowledge and the will to validate those expectations."


I was blue, just as blue as I could be
Ev’ry day was a cloudy day for me
Then good luck came a-knocking at my door
Skies were gray but they’re not gray anymore

Blue skies
Smiling at me
Nothing but blue skies
Do I see

Bluebirds
Singing a song
Nothing but bluebirds
All day long

Never saw the sun shining so bright
Never saw things going so right
Noticing the days hurrying by
When you’re in love, my how they fly

Blue days
All of them gone
Nothing but blue skies
From now on

[2]
I should care if the wind blows east or west
I should fret if the worst looks like the best
I should mind if they say it can’t be true
I should smile, that’s exactly what I do

Irving Berlin

Global Credit Ocean Dries Up

The UK Telegraph published this timely piece by Ambrose Evans-Pritchard on February 24, 2006. It's not just the United States that's been on a huge housing bubble binge, the whole world is!

And gradually, the industrial nations are clamping down and tightening.

I'll bet you didn't hear on the news how Icelandic krone crashed 8% in two days, setting off a wave of little crashes in other currencies as in New Zealand, Australia, and Brasil.

Global Credit Ocean Dries Up

The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard

One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.

"The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned," said David Bloom, currency analyst at HSBC.

"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.

"People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances," he said.

There were early signs of panic this week when the Icelandic krone crashed 8pc in two days, setting off dominoes in high-yielding currencies of New Zealand, Australia, South Africa, Hungary and Brazil.

The debacle was triggered when the rating agency Fitch downgraded Iceland's sovereign debt, a move that would not normally rattle markets.

The new skittishness comes against a backdrop of ever more hawkish moves by Japan and Europe.

"There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.

In his strongest words yet, he said the bank would act "immediately" to curtail its extra injections of liquidity, preparing the way for rate rises above zero in coming months.

"The moment of truth is approaching,'' said Kenichiro Ikezawa of Daiwa SB. In Europe, Sweden raised rates to 2pc this week in the face of an overheated Stockholm property market, while Germany's IFO business climate index soared yesterday to its highest level in 14 years.

The European Central Bank will almost certainly raise eurozone rates to 2.5pc in March, with likely moves to 3pc by the end of the year.

Most of the world is now tightening, with no sign of a fresh credit window opening to keep the game going. This is new. Japan has had the tap on continuously as the trade exploded over the past five years, while America itself became the source of funds after it slashed rates to 1pc at the end of the dotcom bubble, and held them there until June 2004.

The US Federal Reserve has since raised rates 14 times to 4.5pc in a belated effort to restore monetary discipline, with at least two more rises priced into the markets.

It is an open question whether the yen, euro, Swiss franc and Swedish krona carry trades have occurred on such a scale that they have led to over-investment in Latin America and beyond, and compressed US yields, fuelling the American housing boom in 2005 despite Fed tightening.

There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

"History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.

Safe Money Report Reader Roundup, February 2006

In the February 2006 issue of Safe Money Report, Martin Weiss identifies five key risks to the economy going forward:

1) The Middle East and Oil
Hamas has one a free election; Iran has been making threats; Iraq elections have not stopped violence; Syria is rebelling against UN murder investigations; Yemen and Saudi Arabia are battling terrorists, and so forth. Weiss believes these factors could propel oil higher.

2) Inflation Spike
The price of oil is infiltrating the rest of the economy, whether it is in mining copper, or delivering a pizza. The Federal Reserve's core personal consumption expenditures index Q4 was 2.2%, above the Fed's target of 2%. Bonds could be at risk.

3) The Housing Bubble
What we've been hearing from the housing bulls has gradually shifted from:
"We have a tight supply." "The baby boomers are trading up." "Foreign money investing."

to

"It's a soft landing." "It's a healthy cooling."

Housing starts declined more than two times as much as analysts expected in December. New building permits hit a seven month low.

Existing home sales fell 5.7% between November and December. The supply of unsold condominiums increased by over 66%.

The National Association of Realtors reported that in 2005, 43% of first-time home buyers put no money down on their homes.

4) Overreaching for Yield
Treasury and CD yields are still very low. In an effort to stretch for greater yield, investors are piling into securities backed by shaky mortgages.

5) Fed Screwup
The Federal Reserve typically underreacts to risks as they develop then overreacts when things blow up. Weiss believes the Fed is underreacting to inflation risk.

Creative Selling in real estate

Two stories have caught my eye over the last few days about new creative ways to sell homes.

Brubaker-Culton Real Estate is offering a free pet with the sale of a house. They are giving vouchers good for an animal of choice at a local shelter.

I hope it works out, I really do. Having a pet can make a home "complete".

But it's bad enough that humans do stupid things and buy houses they can't afford and end up out on the street. Being an animal lover I worry about animals who often end up as victims of our thoughtlessness and stupidity. I guess being in a loving home, even if the worst happens and the animal has to go back to the shelter, is better than the animal living its entire life in an animal shelter.

The other story is from the Minneapolis Star Tribune about homeowners making a leap of faith. Sellers are burying statues of St. Joseph by their For Sale signs in the hopes that he will bring their asking price, apparently.

Ah, the real estate market must have shifted, can you feel it?

Having it both ways

When the economic numbers come out favorable, the political talking heads trumpet how their policies are "working". When the numbers come out bad, it must be some error, some "anomaly".

From a Reuters story on January 28, 2006:

Slower-than-expected U.S. growth data at the end of 2005 do not accurately reflect the continued strength of the world's biggest economy, U.S. Deputy Treasury Secretary Robert Kimmitt said on Saturday.

"We think those figures are anomalous and out of step with the other figures showing the strength of the economy both now and in the future," he told Reuters on the sidelines of the World Economic Forum in Davos.