Weekly Unemployment Claims Portend Disaster

The Department of Labor Weekly Unemployment Report is now so skewed by abnormalities, it is difficult to get a clear picture. First, let's take a look at the data.

Seasonally Adjusted Data

In the week ending July 25, the advance figure for seasonally adjusted initial claims was 584,000, an increase of 25,000 from the previous week's revised figure of 559,000. The 4-week moving average was 559,000, a decrease of 8,250 from the previous week's revised average of 567,250.

The advance seasonally adjusted insured unemployment rate was 4.7 percent for the week ending July 18, unchanged from the prior week's unrevised rate of 4.7 percent.

The advance number for seasonally adjusted insured unemployment during the week ending July 18 was 6,197,000, a decrease of 54,000 from the preceding week's revised level of 6,251,000. The 4-week moving average was 6,416,250, a decrease of 131,750 from the preceding week's revised average of 6,548,000.

Weekly Claims



click on chart for sharper image

Initial Claims Analysis

One could point at the substantial +25,000 jump in initial claims and conclude things are deteriorating. However, it is difficult if not impossible to know exactly because a huge seasonal adjustment factor beyond the ordinary related to auto manufacturing plant shutdowns skewed the seasonally adjusted numbers.

The unadjusted drop of -78,111 is even more misleading. Moreover, the only way to use unadjusted numbers accurately is on a year-over-year basis and that fails for reasons stated.

Continuing Claims Analysis

Note the huge drop of 131,750 in continuing claims. Ordinarily this might be significant. However, these are not ordinary times. Much, perhaps all of that drop is due to benefits expiring.

Indeed states and federal programs have extended unemployment benefits several times. They do so but do not adjust the headline numbers.

Please look at lines boxed in red for Extended Benefits and EUC 2008. The latter is Federal extensions picking up where states left off. The former is state extended benefit programs.

Note that 2,656,879 people are on extended federal benefits compared to 127,438 a year ago!

In other words, the headline extended claims number of 6,416,250 is off by more than 2.6 million. And one also needs to add in another 352,000 from various state programs.

Still More Considerations

Even though EUC 2008 claims rose by 24,518, one cannot count on that number either because hundreds of thousands have used up all of their extended benefits.

On July 19, I noted 500,000 Will Exhaust Unemployment Benefits by September, 1.5 Million by Year-end.

Unemployment benefits plus extension last 79 weeks in New York, over 1.5 years. Yet, in June alone, for New York alone, 47,000 used up 72 of those weeks, and count on the extra 7.

From the above post, courtesy of Dave Rosenberg:

Record Number See Benefits End



Take a good look at that chart. It's 50,000 now. The expectation is 500,000 by September and 1.5 million by the end of the year. What are the odds Obama creates 1.5 million jobs by the end of the year? Can he really create any? For how long?

Emergency Unemployment Compensation

Inquiring minds may wish to consider the Emergency Unemployment Compensation (EUC) PDF.

EUC is a federal emergency extension that can provide up to 33 additional weeks of unemployment benefits. The first payable week was the week of July 6-12, 2008.

The original extension passed in July 2008 paid up to 13 weeks of additional benefits. Effective November 23, 2008, we can pay up to 7 additional weeks of benefits.

Effective December 7, 2008, we can pay up to another 13 weeks of benefits.

With that backdrop, here are some custom created charts courtesy of Chris Puplava at Financial Sense, based on my request. The charts show the effect of the EUC program over time.

Continuing Claims Since 2000



Continuing Claims Since 1970



Continuing Claims as % of Population Since 2000



Continuing Claims as % of Population Since 1980



Chris notes "The EUC and the extended benefits come out with a lag as Moody’s had data for them only up to 07/11/09 while the continuing claims data is up to 07/18/09. The charts above are through 07/11/09."

Thanks Chris!

Unparalleled Continuing Claims

On a percentage of population basis this recession is unparalleled.

Making matters worse, the US consumer was nowhere near as leveraged to real estate in 1980 or 1982 as now. Also note that boomers are heading into retirement now, undercapitalized and looking for jobs, in effect competing against their kids and grandkids for jobs.

Look at the average age of baggers in grocery stores or greeters at Walmart. These people are not working because they want to; they are working because they have to. Demand for jobs is at an all time high while the number of available jobs and the pay scales of those jobs have both collapsed. The employment situation is not only an unmitigated disaster, things are about to get worse with pending state cutbacks.

Because of expiring claims, continuing claims data will soon start looking better. The reality however, is things will get worse for another year as unemployment soars into double digits. My forecast in January was 10.8% in 2010 while the Fed's was 8.5%. I see no reason to change mine, but the Fed upped theirs.

The implications for housing and especially commercial real estate are ominous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Free Money Runs Out, Congress Authorizes More

With $1 billion already wasted Lawmakers Vote on $2 Billion More to Replenish ‘Clunkers’ Program.

The U.S. House opened debate on an emergency measure to add as much as $2 billion to the “cash for clunkers” program after a burst of demand exhausted most of the initial $1 billion.

The initiative to encourage new-car sales is still in operation, White House press secretary Robert Gibbs told reporters today. Members of Congress had said late yesterday that the clunkers offer was being suspended.

“If you were planning on going to buy a car this weekend, using this program, this program continues to run,” Gibbs said. “If you meet the requirements of the program, the certificates will be honored.”

Named the Car Allowance Rebate System, the program provides credits of as much as $4,500 for the purchase of a new car when turning in an older vehicle to be scrapped. Lawmakers had expected the program to generate about 250,000 vehicle sales and to have enough money to last until about Nov. 1.

The funding was offered as an amendment to legislation by Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, which would ban incentive pay for Wall Street executives.

'Cash for Clunkers' Runs Out of Gas

Inquiring minds have found some interesting quotes in the Wall Street Journal article 'Cash for Clunkers' Runs Out of Gas.

Michael J. Jackson, chief executive of AutoNation Inc. said "It was an absolute success. There's a very compelling case the government should put more money into it. It's a great stimulus to the economy."

Actually a very compelling case can be made that the CEO of AutoNation is an economic illiterate. All the program does is shift demand forward. Those clunkers were going to die at some point. Now sales are up this year which will cut into next year's demand, at the expense of everyone not getting free money.

Why anyone should be surprised at the "success" in generating demand for free money is beyond me. There is always demand for free money. Yet, interestingly, everyone seems surprised by the "unexpected success".

If the government wants more "success", it can give everyone $4,500 for a car. Short-term demand will soar. But long-term demand for cars would crash for the next few years, taxpayers would be stuck with the bills, and valuable resources would be wasted on cars rather than productive assets.

Thus, the "absolute success" touted by AutoNation is in reality a tragedy. Handing out free money always is. Indeed, the more free money handed out, the bigger the ultimate tragedy. The housing crash is poof enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Dan Winters / WIRED Behind the Scenes

Apologies for the double-tap on WIRED, but Andrew Hetherington over at WTJ just dropped in a behind-the-scenes piece on maybe the coolest set of photos I have seen all year.

It's Dan Winters, shooting Brad Pitt for the current WIRED in a "New Rules" issue that is wrapped in the theme of Inglourious Basterds. It's a great walk-thru of just what all is involved in pulling a shoot like this together -- very quickly, I might add.

Link: what's the jackanory? UPDATE, NOV 2012: Sadly, the original post has been removed. Bummer.

Ewave Count on the US Dollar Suggests Move Up is Coming

Many people have been asking me for an Ewave update on the S&P 500. I still don't have one as there are numerous viable counts in play. To me unless the count is reasonably clear, all Ewave is going to tell you is what happened.

That is a general complaint about Ewave (and technical analysis in general) but no one says you have to trade these corrective "jello counts" or patterns.

So let's leave the S&P 500 aside. I do have a clear, as well as interesting count of the US dollar to discuss.

US Dollar Weekly Chart



I have been following the above chart for some time and a few weeks ago emailed a friend "There is room for one more wave down". And so here we are.

But hold your horses. Wave 5's can truncate or extend. That is why I have two "?" on the chart. Either way, the count appears corrective and there should be another relatively strong wave (of some sort) back up once wave 5 down has finished.

Right now, should the weekly candle continue up and solidly break the trendline, it would be suggestive that wave 5 is over.

This is very significant given the fact that the US$ is typically inversely correlated with the S&P 500 as well as commodities. So rather than focusing on the S&P 500 "jello" counts directly, one is likely better off following the US$.

Bear in mind, the primary focus of technical analysis in general is not predictive capability, but rather to find spots where one can initiate a trade with a stop loss relatively close by. In that regard, the solid trendline above is the place to watch.

Daneric's Elliott Waves

I am not the only one to come up with that US dollar count. Dan at Daneric's Elliott Waves sent me the same, but far more detailed, count a few days ago (click on above link to see).

Since then I have been following his site and I can easily say he knows far more about Ewave than I do. What I really like are his "no nonsense" comments such as:

PS - I don't really pay attention to what EWI has as a $ count. This chart I just made up tonight completely on my own. It seemed easy enough to count and the chart generally took less than 30 minutes to complete.

PSS - There is a great positive divergence on the RSI. So indeed it may turn back up hard soon enough. Its hard to say exactly how the micro waves will trace over the next month. But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.

The trouble most people get into with Ewave is coming up with a thesis, then struggling to find a count that will fit it. Given Ewave is rather subjective, that is an easy trap to fall into.

Daneric said "the chart generally took less than 30 minutes to complete".

That is the way it should be. I do not want to spend 4 hours plotting alternatives when all they do is say where we have been, not where we are going, only to be subjected to a barrage of 200 emails all telling me why my count is wrong.

By the way, it only took me 5 minutes to do my chart but then again I only labeled a portion of the chart, a practice I do not recommend because it can cause problems.

Please note Daneric's comment "But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume."

That is quite consistent with my long-term belief the US dollar is in a wide trading range and is not about to collapse (because it already has and every county is embarking on beggar-thy-neighbor competitive currency debasement policies).

The key is neither one of us is forcing a count to appease that belief.

Nasdaq Count

Today I noted the Nasdaq hit a 50% retrace level of the entire move down from the 2007 high. I am not the only one. Please consider The QQQQ's and The Great Asset Mania.

What do stocks like Apple bring you? Not much except one thing: you hope to sell it to the next sucker for a higher amount. The love affair with high tech still lingers from 2000. I hear retail-types at my work talk about how great a time it was and how they all played the market. Of course they all have stories of woe and how they all lost a bundle!

After all, the products and services produced by these companies are what the everyday retail investors sees and uses the most. Apple, Google, Amazon...they see and use these and they invest. So the asset mania does not die easily. Yet the long term waves also shows that it does wane. The qqqq's are nowhere near their 2000 high (nor 2007 high) and are in danger of more hard down moves. These down moves will represent the final dying days of cycle wave c of supercycle wave (a) of the great asset mania.

When people realize that buying Apple at $175 is not a good thing if no one is willing to buy it at $180, eventually all things reach their limit. What choice do they have but sell?

I cannot say I agree with everything Daneric says, but what I have seen so far I generally like. Those wishing for good day to day Ewave commentary may wish to tune into his site.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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We Were Ring Flash When Ring Flash Wasn't Cool

I nearly spit Diet Mountain Dew all over my keyboard tonight when WIRED.com, who purports to write for reasonably normal people, uncorked a review of four different ring flashes.

What is the world coming to? Have we gotten... mainstream?

I certainly hope not.

I spoke to Jonathan Snyder, who shoots for WIRED.com and did the review. And he said since they use them all of the time, he decided to do a quick review.

Notably absent:

The Orbis (seriously, James, you gotta send them one) and Jedrek's DIY Tupperware version. Just sayin'.

You can catch the review here, and see more of photog Jonathan Snyder's work here.

One more tidbit from Jon -- WIRED has just started up a photo blog.

Sweet.

-30-

And Who Says Heathrow isn't Efficient?

(RSS and email viewers may have to click on the title to see the embedded video.)

Have you seen that giant "glad to see ya again" poster up at Heathrow Airport in London?

So, what kind of lighting goes into something like that -- Profotos? Broncolors?

How about a few speedlights.

Nick Turpin's snooted Nikon SB-800 street photography caught the eye of an ad agency in London who wanted to replicate the same look in a controlled, studio environment.

Only problem is Nick's fill light is normally the sun. But it turns out with a budget like that, you can rent the sun, baby!

The speedlights only get a cameo in this video. But it shows pretty much everything from casting (just soft boxes) to shooting, to the over-the-shoulder-looking-beverage-swilling AD, to installation of the actual, rather largish poster.

Hit the jump for a 13-min BBC 4 Radio interview with Nick, set to a slideshow of some of his street images.
__________





You can see more of Nick's work at his website.

Commercial Real Estate Threatens Oregon State Pension Funds

Pension plans in general are in deep trouble. The state of Oregon is the latest on the long, growing list of pension concerns.

Please consider Real estate woes threaten Oregon state pension fund.

The Oregon Investment Council, a citizens board that invests the $45 billion state pension fund, held its annual review of its real estate investments Wednesday. The numbers didn't look good, and according to Nori Lietz, a consultant with the Partners Group who advises the pension fund on real estate investments, "there's still more negative news to come."

Overall, the value of those holdings has fallen 28 percent in the past year.

Now it's all about the economy, which is bleeding the pension fund's other real estate investments. Commercial real estate tends to lag the economy. Job growth, for instance, is a leading indicator of office rentals and supports apartment leasing, retail and industrial space.

Those fundamentals look increasingly dismal. Vacancy rates are climbing and rents are down, putting pressure on the cash flows that property owners use to service their debt. Consequently, delinquency rates are up and property values are falling.

Lietz, the OIC's consultant, said she expects equity values in the U.S. commercial property market to decline by another 25 percent over the next two years.

The refinancing squeeze is pushing more borrowers into foreclosure. And ironically, Lietz said, bankers have been foreclosing on the best assets in their loan portfolios because properties that still have decent cash flows are easier to manage internally or sell. That leaves them with loans on more marginal properties that are far more difficult to manage.

Leitz believes the government's policies to help banks unwind their problems may end up exacerbating them. Earlier this year, the Obama Administration relaxed accounting standards that forced banks to reflect the fair value of their real estate loans on their books. In theory, that buys time for the commercial real estate market to recover, and potentially bail banks out of some of their problem loans.

But if the market doesn't bounce back, banks will be saddled with billions in nonperforming loans and remain reluctant to lend, anchoring the economy indefinitely.

In Japan, banks followed that course after the collapse of their late 80s real estate bubble. The subsequent period of economic stagnation became known as "the lost decade."

Treasury Department Claims Numbers Are Meaningless

Interestingly, the article reports that the Treasury claims "the one-year numbers are essentially meaningless."

One has to wonder, what the state Treasury department was saying a few years' back when values were soaring. Were one year gains meaningless then or is meaningless one-sided?

Oregon CalPERS Connection

The Oregon CalPERS connection is also interesting. From the article:

Last week, one of Portland's signature properties showed up on that radar when New York Life Insurance sued FPS KOIN Center LLC, owner of the fancy downtown office building, claiming the company failed to make its July mortgage payment on the building.

FPS is a partnership of California's massive public pension fund, CalPERS, and a Los Angeles real estate investment firm. They bought the KOIN Center in the summer of 2007 for $108 million.

CalPERS, as frequently discussed is at the very heart of the pension crisis. Please see Calpers Rolls the Dice, Gambling that Riskier Bets will Restore its Health for details.

Fears of a "Lost Decade"

Leitz believes the government's policies to help banks unwind their problems may end up exacerbating them.

In Japan, banks followed that course after the collapse of their late 80s real estate bubble. The subsequent period of economic stagnation became known as "the lost decade."

At long last, someone is finally mentioning what I have been talking about for years: the likelihood the Fed's and the administration's policies extend the problem for years, and the possibility of a lost decade (two actually), in the US.

Please consider the following snip from Buy and Hold Still Bad Advice:

Clearly stocks are a better buy now than in 2007 or 2008. But that does not mean stocks are cheap. Indeed, by any realistic measure of earnings, stocks are decidedly not cheap. Then again, 6-month treasury yields are yielding a paltry .31%.

Can equities easily beat that? Yes they might, but that does not mean they will!

Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.

Two Lost Decades



The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts. Even if it does not last long, there are no guarantees the stock market stages a significant recovery.

Odds of a full recovery in state pension plans is zero without significant reform. Yet not a single state is addressing the real issue: promises that cannot be met and the need to lower costs by reducing benefits and phasing out the plans.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Overexpansion by Banks Hits Brick Wall of Reality: The Point of Negative Returns

Banks have finally come to a realization there does not need to be a branch on every corner. If this story sounds familiar it is because the same discussions took place in 2000.

Here are some interesting comments from the headline story Bank of America to close Hudson branch on Friday.

Bank of America spokesman James Mahoney: "Over the longer term, as customer demands evolve, we see a fewer number of branches that provide more services."

Analyst Richard Bove of Rochdale Research: "While the bank is likely to close the branches, the reason being given is simply farcical," Bove wrote in a research note Tuesday. "The branches will be closed because they are not economically viable."

Pruning Branches to Strengthen the Banks

Barron's picks up the story in Pruning Branches to Strengthen the Banks.

Some banks have been deemed too big to fail. But could some banks simply be physically too big? That seems to be the case with Bank of America (BAC), which was reported to be planning to shut 10% of its 6100 branches. According to the Wall Street Journal, which broke the story in Tuesday's editions, B of A's customers increasingly are opting for online and mobile banking transactions. Moreover, half of the bank's deposits are being made via automated teller machines, up sharply from just one-third six months earlier.

But veteran banking analyst Dick Bove of Rochdale Securities disputes that a shrinkage in B of A's vast branch network would be driven by technology. Economics will be the main factor reining in the ubiquitous red-and-blue branches, he says.

Whatever the motivation, America's big banks are apt to learn the lesson being absorbed by Starbucks (SBUX) -- you can reach the point of diminishing returns from expansion. And once the culling begins, the resulting vacancies in these prime retail spaces can only worsen the downward spiral in commercial real estate as well as employment in banking.

Only now, well into the 21st century, has electronic banking become the norm for retail bank customers. But Bove avers that they had shown a distinct preference for old-fashioned bricks-and-mortar branches. Opening more branches expanded deposits, which earlier in the decade could be deployed profitably owing to low deposit rates and robust mortgage lending at a generous, five-percentage-point spread.

Now, Bove continues, the situation is reversed. B of A has too many deposits (12.2% of the nation's total, boosted by the acquisition of Countrywide Financial), and he says the bank doesn't really want to make loans. At the same time, the yields on its assets are falling faster than deposit rates, which can't drop much further.

Point of Negative Returns

I have to side with Bove on this one: "While the bank is likely to close the branches, the reason being given is simply farcical. The branches will be closed because they are not economically viable."

Cheap money from the Fed created a false economic signal of prosperity and growth. The grand party went on for close to seven years. The bust is likely to be at least that long so don't expect miracle recoveries.

More space will be coming available from Bank of America, Citigroup (C), Wells Fargo (WFC), and others. The sheep always line up. If one bank starts closing branches the rest will too.

Expansion for expansion's sake failed miserably, as it always does. And the Fed forever blowing bubbles of increasing amplitude is the primary reason.

That said, it's important to note that commercial real estate in general is the key take away from this story. Indeed, the same over-expansion problems that plague banks also apply to Starbucks (SBUX), Home Depot (HD), Lowes (LOW), Target (TGT), Pizza Hut (YUM), and for that matter, nearly every business on the planet.

So while everyone else is putting their party hats back on, celebrating the end of the recession, I caution the "horn tooters" this is not an ordinary recession.

I touched on this in the Incredible Shrinking Boomer Economy.

"If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades."

At some point the economy will bottom. Perhaps it already has. However, the Brick Wall of Reality, the Point of Negative Returns, is still large and in charge. A "Job Loss Recovery" looms. There is little reason for businesses to expand beyond inventory replenishment nor is there any good reason for banks to increase lending. And if one reads between the lines, various members of the Fed sound increasingly aware of that fact.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Many Chime In On "Housing Hypocrites" Post

Yesterday's post Emails from Housing Hypocrites about Ethics generated an unusually high number of responses. Let's take a look at some of them.

Mike From NYC Writes:

Calculated Risk has a post titled CRE: Office Building Owners Walk Away

In this story, the building owners are "transferring their ownership interest to their financiers". Well, that's one way of putting it!

One thing I have noticed, and you mentioned a similar thing to me in an email not too long ago, is that when a company makes a business decision to pay or not, for a mortgage or other business deal, no one makes a big moral issue out of it.

But when individuals do it, it's like they are breaking an eleventh commandment or something, like they are exposing some huge moral failing.

I'm just really sick of everyone making a huge moral case against people who are in most cases already in trouble, and those same critics never show up to tar corporate defaulters with the same brush.

regards,

Mike From NYC

"Little Joe" on Silicon Investor writes:

This is how I see it.

It was the bank's outright fraud that brought the country to its knees and in reality caused these properties to go upside down.

The values would never have gotten as high as they did but for the banks' fraud.

The consumers debt was significantly increased because inflated prices were paid for the home. We would not have this precipitous drop without the banks' fraud.

Then the banks get bailed out and some guy or gal who bought a home paid 20% down took payments they could afford finds him/her self paying for a home that is worth less than they paid for it.

The government has made no attempt whatsoever to bring the banksters to justice. They are rewarded with bail outs and bonuses.

So when you sum up:

Bank Fraud causes the problem.
Bank gets bailed out CEO's get big bonuses.
Consumer got to pay an inflated value for their home and watch its value decline to less than the mortgage balance.
To add insult to injury consumers other assets dropped.
To add further insult to injury consumer has a taxpayer gets to pay for the mess.
Bankers don't get prosecuted.

When I put that together I think balance of justice is on the side of the consumer who bailed out.

Mark Writes:

While I agree with the majority of your assertions in your recent post "Email from Housing Hypocrites about Ethics", I find myself disagreeing with your implication that it is somehow immoral to "dump garbage on someone else at an inflated value." I don't understand how it could be immoral to sell one's property at any price the market will bear. This is, of course, assuming that the seller did not commit any sort of fraud in his attempts to maximize the selling price of his property.

I do, however, agree that HH's accusations of hypocrisy on your part are unfounded and inappropriate.

In a similar fashion Rob Writes:

Hi Mish:

Why is this person selling his home when real estate was overvalued amoral?
I sold my MSFT position because i thought the shares had run way too far into
the earnings report and considering the economic environment I assumed earnings
might not be strong. I obviously sold this MSFF stock to a buyer who took losses the following day.

I don't see what he did as amoral... selling his home because it was overvalued?

Just Sharing
Best
Rob

Reply to Mark and Rob

What "HH" did was arguably amoral by his standards not mine. He is the one who brought ethics into the equation not me.

I am quite perplexed how people could possibly misconstrue my application of HH's ethics against his own position for me personally thinking HH did something wrong by selling.

For the record, I have no qualms about people, including" HH", who sell assets for what they can get for them as long as there is no misrepresentation of those assets. Nor do I have a problem with someone executing their legal right to walk away and pay the prescribed penalties. Both are free-market concepts.

However, I do have a problem with HH's "Holier Than Thou" attitude based on his own misguided sense of ethics, as well as his application of those ethics where it should not apply at all.

Most readers understood the difference, Rob and Mark (and several others too) missed the boat. Here are responses from two people that understand the ethics issue for what it really is.

Jimmy Writes:

The original transaction was a legal event between two consenting parties.

What is unethical is for the government to bail out the party overpaying for the house (either directly or indirectly by bailing out the bank that suffers the loan loss) and then imposing the cost of that bailout (via taxation, inflation or the like) on me (not a party to the original transaction) and my children.

The bailout (and its ultimate cost to me and my children) is an involuntary event imposed on me by a government gone far beyond its constitutional limits of authority.

"HD" Hits The Nail On The Head:

Hello Mish,

It's "HD" here, your friendly neighborhood anonymous East Bay realtor/lawyer.

As both a lawyer and real estate broker, I always get a kick out of some people arguing that other people should commit financial hari-kari by continuing to pay a mortgage that, even if they could pay it, would swallow all their money, and leave them totally without any savings during their old age.

Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep paper title to the house, and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or, stop making payments, and hand the keys back to the lender.

Morality and ethics don't even enter the equation. Either option is perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the four corners of the pages of the mortgage contract.

Remember, it was lenders who totally abandoned traditional prudent underwriting standards. Moreover, they were fully aware of the contracts they signed and that borrowers could indeed walk away. So whose fault is it, when borrowers do walk away?

For borrowers putting 0% down at the peak, there are very few cases where it makes sense for the borrower to continue to pay.

Indeed, the ethical thing to do, is for each borrower who is underwater to look without blinders at their family's financial situation, not just now, but over the long term.

If paying off a mortgage for $750,000 on a house now worth $450,000 at best, would result in no money left over for the kids' education or the parents retirement income and healthcare needs, then the moral thing to do is bite the bullet now, take the hit to one's credit record, find housing that can be had for no more than 30% of the family's income (which could very well be the foreclosed house, rented to them affordably, and then sold off by the FDIC to an investor at a reasonable capitalization rate), and get frugal everywhere else in the household budget, so that they can build some savings for the time in their lives when regular work might not be possible.

Bingo!

In regards to individual homeowners, if there is an ethics issue at all it would be for the homeowners to make sure their families are protected from harm rather than accepting financial ruin for themselves and their family because of someone else's misguided sense of ethics.

In regards to financial institutions, the free-market should be our guiding light, not government manipulation, intervention, and taxpayer sponsored bailouts.

In regards to both, my position is and has been consistent.

Bear in mind I have no problem with someone who for sake of their own ethics, refuses to walk away from a mortgage. The problem arises when some self-appointed, anti-free-market ethics-gods think their sense of ethics is the only way to do business.

Here is one more email for the road.

The "Earl of Huntingdon" Writes:

Dear Mish:

I want to respond to the “Emails from Housing Hypocrites about Ethics” article and your retort.

I made a decision to move to the Chicago suburbs in late 2007. Since my ex-wife was getting married and moving there, I made this decision to reduce the distance between parents for our children; we share joint custody, along with 50-50 placement, and it would be unfair to reduce their time with either parent. I found a unit that had depreciated 30% in value at the time. I was assured by my realtor and my lender that the worst-case predictions were calling for perhaps a 5-10% further decline; but, since I was building those assumptions into my offering price and willing to hold onto the property for more than 5 years, I would have no problem getting back to break-even in due time. Since I took ownership, the property value has plummeted another 33%.

I am quite embarrassed and ashamed with my situation. I bought the unit with little money down, but the unit had ‘equity’ as the appraisal indicated $15K of value more than what I offered. I realized with my salary, that I would struggle financially for a certain amount of time; I believed the duration would have been about 12-15 months to return to a point where I didn’t have to worry as much. I assumed that as time marched on, a raise and bonus here-and-there along with trimming of expenses would allow for limited opportunities to see a reasonably-priced local concert, a night out and activities with the children. I take full responsibility for putting myself in a situation where, although I could afford the home, I would have to make some sacrifices; heck, I was raised in worse conditions. This was something I needed to do for the sake of raising well-adjusted children. Besides, the Fed assured the American public that the banking system was sound and the financial future was stable, although the future was a bit unclear.

I also accept full responsibility for not accounting for unplanned expenses. Those expenses quickly started to pile up; far more than what could be imagined.

I’m now in a position where I’ve cut back on groceries (significantly), eliminated cable tv and eliminated external activities unless they’re free and close to home. I know there are others who are in worse shape. I’ve struggled with a decision to call ‘You Walk Away;’ I accept my role in this mess and that’s what is preventing me from acting.

Quite frankly, I don’t know what I’m going to do with my financial situation just yet. I may decide to walk away knowing that a similar sized unit can be rented for half of what I pay in combined mortgage payments and condo association fees (an opportunity that did not exist when I bought); if you do the math, renting will allow me to pay back my other bills and return to a better financial condition in a much, much shorter time. Then again, I may decide to fight my way through. Perhaps, I could find a part-time job to help make ends meet. Either way, it will be my decision and I will deal with the consequences.

There are so many wrongs in this situation. It was wrong for investors, speculators and buyers to have driven prices so high. It was wrong for Realtors and agents to have advised their clients to proceed with the lofty purchase prices. It was wrong for lenders to approve the values of these properties. It was wrong for the government not to act to help stem the wild ride in the housing market. It was wrong for me to believe that owning property is always to be viewed as an investment. And, it was wrong for me to have followed the bad investment available in the media and not to have been aware of the economic advice that warned of a changing financial climate.

If I stay and struggle through my situation, I will not do so quietly. Overall, we (Americans) still lack accountability. We continue to blame those at the end of the chain instead of those who initiated and contributed the greatest to the demise. If I stay, I will lead the local voice in demanding that those in a position of power and control be held accountable for their actions. I have questions that need to be answered. Why do we continue to allow the likes of Ken Lewis to remain in power at the heart of the financial system? Why do we not demand that the executives and managers at each of the offending financial institutions, investment firms and insurance firms return their pay increases and bonuses from the past 8 years? Why do we not demand that the banks, investment firms and insurance companies not only reimburse the TARP money but all of the profits they made over the past 8 years (along with the pay and bonuses)? Yes, I realize they money is gone, but they need to reimburse us for all the wealth they took. And finally, why do we not demand that the Federal Reserve be abolished or greatly reduced in function? Somebody, please do something other than maintain the status quo and allow the Sheriffs of Nottingham to continue to pillage this country.

Take care,

EH (Earl of Huntingdon)

Thanks for sharing "EH".

My personal advice to "EH" is to run, not simply walk, away from this mess.

That said, my take is that whatever "EH" does is correct. He is the one who has to live with his decision. Clearly "EH" made some bad choices and he and his family are suffering for it. No one should be judging "EH" for what he does in his situation at this point going forward.

History as to how and why "EH" is in this mess does not really matter. Being underwater in a mortgage is a sunken cost, and sunken costs are irrelevant in deciding how to proceed. The term "Don't throw good money after bad applies."

However, if ethics prevent "EH" from walking away, who am I to judge? If "EH" does walk away, who is "HH" to judge? The problem is one of us is judging (on the basis of ethics) and one of us is not judging at all (for the simple reason ethics has no bearing).

At the heart of this issue are two irrefutable facts:

1) "Mortgages are not ethical documents, they are legal contracts." Those contracts stipulate the penalties for breakage. Both parties signed and agreed to the penalties for breakage. If one side did not set the penalty high enough, that party and that party alone is responsible for the consequences.

2) In a free market system, failed institutions should be resolved in bankruptcy court not via taxpayer bailouts mandated by government bureaucrats. Furthermore, there is no legal or moral justification for the Fed, Congress, or the Treasury to be picking winners and losers at taxpayer expense. Repetitive propping up of private institutions is not only a moral hazard that invites more reckless behavior, it is theft perpetrated against US citizens via cheapening of the US dollar (or tax hikes), for the sole benefit of those hand-picked private institutions.

Those like "HH", blaming people like "EH" have their fingers pointed in the wrong direction. The fingers ought to be pointed at the Fed, Congress, the Treasury, President Bush, and President Obama.

Good luck to you "EH", whatever you decide. Just make sure the decision you make is based on how you feel, not how someone else thinks you should feel.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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75% Favor Auditing The Fed; Fed Job Approval Rating Lower Than IRS

Here's some genuinely good news for a change. A new Rasmussen poll shows 75% Favor Auditing The Fed.

So much for the ongoing secrecy of the nation’s independent central banking system. A new Rasmussen Reports national telephone survey finds that 75% of Americans favor auditing the Federal Reserve and making the results available to the public.

Just nine percent (9%) of adults think that’s a bad idea and oppose it. Fifteen percent (15%) aren’t sure. Over half the members of the House now support a bill giving the Government Accounting Office, Congress’ investigative agency, the authorization to audit the books of the Federal Reserve Board.

While the president hopes to expand the Fed chairman’s regulatory controls, 46% of Americans say he already has too much power over the economy.

Fifty-one percent (51%) oppose expanding the Fed’s regulatory powers.

Despite Bernanke’s pledge that the Fed will keep interest rates and inflation down, 54% of Americans think interest rates will be higher a year from now, up 20 points from April.

Perhaps helping to drive the support for regularly auditing the Fed is the growing unpopularity of Obama’s economic initiatives to date. While the Fed is an independent agency, just 20% of Americans believe the Fed chairman is truly independent of the Obama administration. Sixty percent (60%) say his decision-making is influence by the president.

Fed Job Approval Rating Lower Than IRS

CNBC presents an interesting take on the poll in Fed Job Approval Rating Lower Than IRS.

Americans think the Federal Reserve is doing a worse job than even the much-maligned Internal Revenue Service.

Only 30 percent of Americans think the Federal Reserve's Board of Governors is doing a good job despite the central bank's unprecedented efforts to battle a crippling recession, according to a Gallup Poll released on Monday.

That makes the Fed the worst reviewed of nine key agencies—including the tax-collecting IRS —the Gallup poll of more than 1,000 Americans between July 10 and 12 showed. Twenty-two percent of Americans said the central bank was doing a poor job.

The poll comes as Fed Chairman Ben Bernanke is increasingly going public with a defense of the Federal Reserve's handling of the crisis in an effort to ward off a congressional proposal by Republican Representative Ron Paul that would undercut the Fed's independence.

In 2003, the last time Gallup polled Americans on their view of the Fed, 53 percent said the Fed was doing a good job.

This poll is an indication Bernanke is losing the publicity battle on his Self-Promotional Media Blitz.

Turn up the heat. Call your legislative representative again tomorrow and tell them you favor auditing the Fed, then getting rid of it.

Please see Speak Out - Audit the Fed, Then End It! for Fax numbers. You can also get Phone, Fax, and Email numbers from the Online Directory for the 111th Congress.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Arizona May Sell State Capitol Building To Balance Budget

Arizona, like many states is in dire financial straits. What's unique is Arizona's plan to help balance the state budget. Please consider Desperate state may sell Capitol buildings, others.

Call it a sign of desperate times: Legislators are considering selling the House and Senate buildings where they've conducted state business for more than 50 years.

Dozens of other state properties also may be sold as the state government faces its worst financial crisis in a generation, if not ever. The plan isn't to liquidate state assets, though.

Instead, officials hope to sell the properties and then lease them back over several years before assuming ownership again. The complex financial transaction would allow government services to continue without interruption while giving the state a fast infusion of as much as $735 million, according to Capitol projections.

"We've mortgaged the legislative halls," said an exasperated state Rep. Steve Yarbrough, a Chandler Republican. "That just tells you how extraordinary the times are.

"To me, it's something we're going to have to do no matter how much we find it undesirable."

Earlier this month, Republican Gov. Jan Brewer vetoed such sale/leaseback provisions along with most of the rest of a fiscal 2010 state budget plan sent to her by the Legislature.

But the provisions are expected to return as part of a GOP-led legislative budget proposal surfacing this week. Although Brewer spokesman Paul Senseman called sale/leaseback deals "one of the governor's least favorite options," he conceded the likelihood that they'll play a key role in any plan to close a state shortfall estimated at $3.4 billion.

"This is the predicament we find ourselves in," said Tom Manos, a Brewer budget adviser. "We've exhausted the better options."

State properties now being considered for sale and leaseback include the House and Senate buildings, the Phoenix and Tucson headquarters of the Arizona Department of Public Safety, the State Hospital and the state fairgrounds, according to a document obtained by The Arizona Republic. Some prison facilities also are under consideration.

In total, the list comprises 32 properties that, if built from the ground up, come with a combined replacement value in excess of $1 billion.

Under the most recent legislative proposal, the state would seek a series of lease arrangements spanning as much as 20 years. Deals that would generate the targeted $735 million in revenue would mean state lease payments totaling $60 million to $70 million a year, according to budget analysts.

House Majority Leader John McComish called the payments preferable to a tax increase, as proposed by Brewer, or alternative fiscal schemes such as selling future income from state Lottery sales in exchange for a lump-sum payment.

Private prisons

While the state is looking to sell and lease back selected properties, it also may try to contract out the operations of some prisons. The concessions provision is expected to be included within the new budget proposal, and legislative analysts believe it could generate as much as $100 million (on top of the sale/leaseback revenue) for state coffers. Private, for-profit prison operators would bid for the right to manage selected facilities, but the state would maintain ownership.

The concept concerns prison officials, who worry whether a private operator would be equipped and trained to handle the state's most hardened criminals. In a letter to Brewer last month, Corrections Director Charles Ryan wrote that a private operator would pay lower wages and provide less training.

You can only sell the Capital Building once.

It is disingenuous to suggest "better options are exhausted". The correct solution to this mess is to cut services, renegotiate union contracts, cut legislative wages, and eliminate ridiculously generous defined benefit pension plans.

Bear in mind, you can only sell the Capital Building once. Then what? Is anyone looking ahead?

"Corrections Director Charles Ryan wrote that a private operator would pay lower wages and provide less training."

In regards to training, especially in light of states cutting back everywhere, one can easily make a case that private enterprise will provide more training, not less. Moreover, government supervision and oversight of the operation might eliminate such concerns.

In regards to lower wages, Ryan is correct, but that is a very good thing not a bad one.

Eliminating services should always be the first choice, but for many essential services like prisons, garbage collection, even fire departments, privatization is the way to go.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Emails from Housing Hypocrites about Ethics

In Preemptive Defaults I discussed how consumers "trapped in a whirlpool of debt, interest payments, and fees spiraling out of control, finally see the light of preemptive defaults and elect to walk away".

In response, I received an email from "HH" calling me a free market hypocrite. The issue was ethics.

"HH" writes:

Mish, nothing personal but you sound like a bit of a hypocrite. A strong advocate of free markets and free will unless its inconvenient or doesn't make sense.

Oh, and many of these borrowers "just don't feel like paying anymore". Isn't that special. Yes, I sign a document promising to repay what I borrow but only if it makes sense to me and my American Idol world. If it doesn't, Obama says I can stop repaying and still squat in my home and have it both ways. How lovely.

What a country of losers we are turning into. I only repay a debt when it makes sense to me. Well, in that case what's the point of even signing papers. Just hold up the bank.

Really?

On the contrary I have been remarkably consistent. People have the right, but not the obligation to do what is in their best interests.

An exchange of emails later "HH" tells me:

I saw the entire debacle inbound and sold my real estate but now I should subsidize someone else's irresponsibility (even though they are having no problem paying) because "its legal"? Wow. How inspirational. You sound like someone who is devoid of ethics.

In a nation going down the crapper where people have basically stopped paying their bills even though they incurred them and the federal government and subsidized banking system (and some self-important bloggers) are encouraging economic anarchy you think anyone is going to give a rats ass about a credit score?

So here we have it. Housing Hypocrite "HH" gives me a lecture about ethics while admitting he saw the debacle coming and dumped his problems on someone else.

"HH" went on to say "Two wrongs do not make a right". Certainly that is a truism. But then again two wrongs and a right does not make three wrongs.

The two wrongs were:

1) Lending institutions made reckless loans.
2) Careless and/or greedy (most likely both) consumers acted irresponsibly.

Act three (what to do next), is independent of acts one and two.

"HH" is in favor of a free market that allows him to dump garbage on someone else at an inflated value, while at the same time criticizing others for amoral behavior by acting in their best interests and legally walking away.

Pray tell, who is the hypocrite?

Followup From You Walk Away

The original post started with an Email from Jon Maddux, CEO of You Walk Away. Here is a followup conversation with Jon:

Jon: CNN called me on Friday to talk about banks walking away from houses. We have several customers this is happening to.

Mish: You have several clients trapped in no man's land with no one wanting the house?

Jon: Yes, we have several clients where the lender either refuses to even file the Notice of Default (NOD), or the lender canceled the foreclosure sale all together. There is one case in particular where the lender just canceled the note and gave the property back to the homeowner. The homeowner doesn't live there unfortunately and doesn't really want the house.

Morals? What Morals?

Is this a question of morals? If so, why are banks allowed to dump properties back into the system leaving cities and states responsible for cleanup?

Clearly there is plenty of blame and finger pointing all around.

Fiduciary Responsibility Enters Into Equation

As an investment advisor, I have a fiduciary responsibility to my clients to tell them what I think is in their financial best interests.

Imagine the results if everyone was bound by such ethics. For starters "HH" would never have been able to unload his garbage on someone else knowing full well the debacle was coming.

Indeed, if Realtors had any sense of fiduciary responsibility towards their clients could housing prices have gotten as high as they did? If consumers and bankers and broker dealers had their clients' best interest at hand would things have gotten so extreme?

Although my fiduciary responsibility extends only to clients and not to this blog, I prefer to have the same set of standards in place for both. In that regard, I have no qualms (indeed I must have no qualms) about telling people what is in their best financial interests as long as it is legal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Consumer Confidence Numbers Retreat Again, Falling More Than Expected

After rebounding from the depths of hell in February, the Consumer Confidence Survey shows Consumer Confidence Numbers Retreat Again.

The Conference Board Consumer Confidence Index™, which had retreated in June, declined further in July. The Index now stands at 46.6 (1985=100), down from 49.3 in June. The Present Situation Index decreased to 23.4 from 25.0 last month. The Expectations Index declined to 62.0 from 65.5 in June.

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "The decline in the Present Situation Index was caused primarily by a worsening job market, as the percent of consumers claiming jobs are hard to get rose sharply. The decline in the Expectations Index was more the result of an increase in the proportion of consumers expecting no change in business and labor market conditions, as opposed to an increase in the percent of consumers expecting conditions to deteriorate further."

Those saying business conditions are "bad" increased to 46.3 percent from 45.3 percent, however, those saying conditions are "good" increased to 9.1 percent from 8.1 percent. Those claiming jobs are "hard to get" increased to 48.1 percent from 44.8 percent, while those claiming jobs are "plentiful" decreased to 3.6 percent from 4.5 percent.

The percent of consumers anticipating an improvement in business conditions over the next six months decreased to 18.0 percent from 20.9 percent, however, those expecting conditions to worsen decreased to 18.9 percent from 20.4 percent.

The labor market outlook was also mixed. The percentage of consumers expecting more jobs in the months ahead decreased to 15.0 percent from 17.5 percent, however, those expecting fewer jobs decreased to 26.3 percent from 27.6 percent. The proportion of consumers expecting an increase in their incomes declined to 9.5 percent from 10.1 percent.

Consumer Confidence Falls More Than Expected

A few extra details on the Consumer Confidence numbers are in Bloomberg's report U.S. Consumer Confidence Falls More Than Forecast.

The Conference Board’s confidence index dropped to 46.6, a second consecutive decline, following a reading of 49.3 in June, a report from the New York-based group showed today. The figure reached a record low of 25.3 in February.

The share of consumers who said jobs are plentiful dropped to 3.6 percent, the lowest level since February 1983. The proportion of people who said jobs are hard to get climbed to 48.1 percent from 44.8 percent.

Company results indicate households are being frugal, even with spending on food. PepsiCo Inc., the world’s largest snack maker, said second-quarter profit fell as consumers favored less-expensive drinks.

Today’s figures corroborate other reports. The Reuters/University of Michigan final index of consumer sentiment declined in July for the first time in five months as surging unemployment and stagnant wages shook households.

Your Bag of Chips got Bigger

In regards to increasing frugality on food, inquiring minds have noted Your bag of chips got bigger but price stays the same.

Your eyes are not deceiving you in the grocery store. Yes, your bag of Doritos just got bigger. No, the price didn't change.

Last year, food packages shrank as food-makers, dealing with record high ingredient costs, struggled to maintain their profits. But the weakened economy has caused a slump in demand for ingredients such as corn and oil, pushing those prices back down. With lower ingredient costs -- and higher consumer demand for more value -- some brands such as Frito-Lay are shifting back to bigger packages, and doing it without raising prices.

So far, the most evident size boosting is in the chip aisle, where Frito-Lay dominates. The company has boosted package sizes for brands such as Doritos, Cheetos and Fritos by 20 percent, reversing cuts made to bag sizes last year. Bags on shelves feature a white stripe announcing: "Woa there's 20 percent more free bold bites in here."

Certain Doritos flavors have gone from 12 ounces back to 14.5 ounces, while Fritos bags are 17.5 ounces, up from 14.5 ounces. The pricing is unchanged, ranging from $2.89 to $3.99. A spokesman said Frito-Lay was unsure if these changes would be permanent.

Experts say offering larger sizes -- along with other methods, such as coupons or buy-one-get-one-free promotions -- can persuade shoppers who are trying to save money to stick with name brands.

Name brands have been running "buy one get one free" campaigns on and off for at least a year. Now they have increased the number of ounces in the bag as well. Of course all they really did was put back the ounces they last took out, but it's a start.

From chips to cars it's clear that companies must respond to the Incredible Shrinking Boomer Economy where boomers have begun to downsize and generations X and Y are more concerned about value shopping or "cheap chic" than they are in "quintessential boomer brands" such as Mercedes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Boot Camp II: Assignment #3

For assignment number three in Boot Camp 2, your job will be to use light to create an interesting architectural interior shot.

And if you are as creative as this entry in a previous Boot Camp, you won't even have to completely make the bed. Details, inside.
__________


I expect that this one will bring a lot of entries. The introverts don't have to talk to anyone and the single-flash folks will be able to use other, ambient sources to augment their lighting. Then there are the cool prizes, of course. We turned this one up a notch in that category.

And for the amateurs, this will be good practice for what could very easily be your first $5-digit assignment.

How so? Let me 'splain.

How can I put this delicately, other than to say that the vast majority of real estate photography is a fetid, pile of steaming excrement?

I mean, why would you bother to take nice photos when all that is at stake is the first impression of the single most valuable transaction you will ever make?


My Experience

When we sold our house last spring, I spent a little time shooting the rooms and setting up a website showcasing the house. Not a lot of work, and zero expense. It also was kinda fun, and left us a nice package of photos to remember the house by.

To be fair, we still have no way to remember Ben's room as it really was because we had to clean it up to shoot it. Kinda like an overenthusiastic mortician. ("Wow, uncle Bob never looked THAT good ...)

But the upshot of going to this extra trouble was that in the spring of 2009 (The Great Potato Famine of Real Estate) we sold the house in three weeks for the full asking price -- twice.

(The first contract fell through on finances and we turned right around and sold it again.)

We priced it accurately, which you absolutely have to do to sell a house these days. And we put it out there with house shots that were far-and-away better than any other house in its price range. Which, believe me, was not hard to accomplish.

The result was an insane amount of buyer traffic from the moment the house hit the market. We basically could not go home except to sleep there. I am absolutely convinced the photos generated much of the traffic, as there was a huge inventory of houses in our price range on the market.

Shortly after that, I shot real estate pics for some good friends of ours, too. Their house also sold very quickly, for close to the asking price. In this market, that's a pretty big coincidence if the photos had no effect.

But then, it is hard not to look better then direct, on-camera nuclear flash in the other house photos...


Your Assignment

For Boot Camp 2, assignment #3, you'll only need to shoot one room -- any room -- but try to light it in a way that makes it look like something special. Light can create a moment, a sense of place or a feel. The photo at the top of this post is an excellent example.


[UPDATE: Someone asked in the comments if this can be a commercial space. In the sense of keeping the playing field relatively level for everyone, let's keep it to a residential space. -DH]


Try to go beyond merely recording the room and stretch yourself into making an artful photo. I say this, because you will be up against lots of very well-lit rooms, and the ones that stand out will have that little something extra.

No people in this one -- it's a room shot. The scantily clad eye candy on the couch is not gonna push you over the top.

For basic resources, consider the earlier post on doing my own real estate shots. For the spartan of gear, there is also another post from a ways back on shooting a log cabin (at left) with one SB-800. Lastly, there is the post from the hotel in Costa Rica.

Just some basics to get you started. But again, the ones who rise to the top will have some special sauce that seals the deal. And don't think you have to go over the top on this one either. The special sauce might be a perfectly sparse-but-elegant composition -- as in the photo up top, for example. Make a picture.


How You Can Help

If you are looking for the charitable component from this one, it could hardly be more obvious. If you have a friend selling a house, consider spending a few hours shooting it for them.

It will almost certainly improve their odds over the typical real estate photo dreck. And better yet, it should get you a pass on helping them move.

Besides, you might actually turn out to be good at it. And who knows where that could lead.


Prizes, We Gots Prizes

You can never be too rich, too thin or have too many light sources. So we are going to "plus two" the winner with a full LP120-based multiple-flash Strobist Kit courtesy the folks at Midwest Photo Exchange.

That is a $450 value, and features (2) very versatile, slaved LumoPro LP120 flashes, an 8-foot stand, an Interfit combination boom/stand, (2) white umbrellas, (2) shorty swivels, a Universal translator (to sync the flashes up any camera) lotsa gels, a 16-foot sync cord, gaffer's tape, bongo ties (similar to ball bungees) and a padded carrying case. Hit the link above from more info and pictures.

FYI, the LP120s have proved very popular and the second manufacturing run is expected to sell out within about three weeks. And the lead time on run #3 (in progress) means that they will be out of stock until late September. But as the winner, yours will of course be reserved and unavailable for purchase by the unwashed masses.

But wait, there's more.

As with the other prize packs, we are throwing in a set of Strobist DVDs, which themselves are currently out of stock in the US. (The next US run should be arriving in early September, and EU-types can still get them duty-free in the UK via The Flash Centre.)

And for those of you who clearly are not yet playing with a full deck, a set of Trade Secret Strobist lighting cards.

How's that for some cool prizes?


The Fine Print

Because someone asks in the comments every single time, please refer back to the first assignment post for the basic info on how to enter your photo and where to go if you have Flickr problems questions.

But PLEASE NOTE that the tag is different for this assignment. It is:


SBC2ASSIGN3


So don't screw up and repeat the tag from the first assignment. The photo must also be in the Strobist pool (so remember to add that lighting info) to be entered. If you are successful, your photos should appear in this search within a few minutes. Please, only submit one entry.

If you want to ask questions, or otherwise discuss this assignment, you can do so in this thread.

And you can check out some of the other bloggers following along, here.

The due date for this assignment is end of day, local time, August 14th, 2009. Don't be late.

And for the verification shot (which will be required of the winner to prove he or she took it after the assignment date) reach around that camera and make a second version of the same shot with your hand giving the "thumbs-up" sign in the foreground.

Just to keep it legal.

November 8-15: Workshop in San Miguel De Allende, Mexico

I will be teaching a five-day lighting class for the Santa Fe Workshops this fall in the colonial-era town of San Miguel De Allende in Mexico. I am totally psyched on the location, and very much looking forward to going. It'll be my last extended workshop of the year, so c'mon down if you are up for a five-day intensive in a beautiful destination.

Our focus will be on layering flash (single and multiple) with controlled ambient to create sophisticated photos with minimal gear. You can learn more at SFW's website.

We're gonna have fun -- hope to see you there.
__________

(Thanks Tricia Cronin, who will be assisting in Mexico, for the photo!)

-30-

Incredible Shrinking Boomer Economy

BusinessWeek has an interesting cover story this week about The Leaner Baby Boomer Economy.

Calling Mercedes the "the quintessential boomer brand", BusinessWeek estimates that Mercedes will sell a third fewer cars in America. The article also notes efforts by companies like Nordstrom (JWN), Starwood Hotels & Resorts (HOT), Outback Steakhouse, BMW and Target (TGT) to offer value shopping or "cheap chic" in an effort to reach out to generations X and Y.

By now most are familiar with this new wave of frugality. Thus the real story is not article itself but the is the easy to miss sidebar statistics as follows:

• $400 Billion: Amount that will come out of annual U.S. consumption as thrifty boomers push savings rate from 1% to nearly 5%.
  
  
• 47%: Boomers share of national disposable income in 2005 before the bubble burst. Boomers contributed only 7% to national savings.
  
  
• 2.4%: Forecasted GDP growth over the next three decades as boomers ratchet back. GDP has grown 3.2% a year since 1965.
  
  
• 69%: Portion of boomers aged 54 to 63 who are financially unprepared for retirement.
  
  
• 78%: Boomers' share of GDP growth during the bubble years of 1995 to 2005

Those stats are from a McKinsey study, and there is nothing remotely inflationary about any of them.

In his Town Hall Meetings Bernanke said:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades.

If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Drugmakers Ramp Advertising Campaign For Health Care Reform

Be prepared for a barrage of commercials from pharmaceutical manufacturers telling you what a "tremendous deal" the health care reform package is. Clearly reform is a "tremendous deal" for them, otherwise they would not be pushing it so hard.

Please consider Drugmakers Consider Ad Campaign on Health Overhaul.

Drugmakers are considering a $100 million advertising campaign starting as early as September to push legislation that would overhaul the health care system, said a person familiar with the discussion.

The Pharmaceutical Research and Manufacturers of America, the industry’s lobbying group, discussed funding the ad campaign during a meeting in Washington last week, the person said. PhRMA spokesman Ken Johnson said no decision has been reached on the group’s campaign strategy for when Congress reconvenes after the August recess.

PhRMA will be running television commercials in August promoting the importance of the drug industry on the economy in states where pharmaceutical companies have operations, Johnson said. PhRMA said they support measures to revamp the health care system and will contribute $80 billion over 10 years to lowering drug costs. They also stand ready to oppose legislation that would allow the government to directly negotiate prices on medicines sold through the prescription drug program of Medicare, the government’s health plan for the elderly and disabled.

Two people familiar with the discussions in Washington said the amount of money put into ads could increase to $120 million.

$8 Billion a year for 10 Years

Will PhRMA really lower costs by $80 billion? Who gets to measure? How much will PhRMA profit?

In order, the answers are no, PhRMA, and immense.

The last two questions are easy to figure out. The pharmaceutical manufacturers would not be spending $120 million in advertising if it did not mean immense profits for them. Note "They also stand ready to oppose legislation that would allow the government to directly negotiate prices on medicines sold through the prescription drug program of Medicare, the government’s health plan for the elderly and disabled."

In other words the manufacturers do not want group rates. US consumers pay the highest rates in the world for prescriptions. I would like to see legislation that would allow drug imports come in from Canada and for the rest of the world to pay their share of the costs.

By the way, the ads have already started. I saw one last night.

The more promotion there is for this package the more leery of it you should be. The reason the AMA, AARP, and now PhRMA are all lining up behind healthcare reform is because everyone of them has been bought out by sweeteners.

The manufacturers smell another handout at taxpayer expense. Don't fall for it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Real Treasury Yields Highest In History

Bloomberg is reporting Real Yields Highest Since 1994 Aid Record Debt Sales.

The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. prepares to sell $115 billion of notes this week.

Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.10 percent today, compared with an average of 2.74 percent over the past 20 years.

The gap helps explain why investors are buying bonds after losing 4.8 percent this year, the steepest decline on record, according to Merrill Lynch & Co. indexes that date back to 1978.

June CPI - All Urban Consumers



click on chart for sharper image

The above chart from Consumer Price Index June 2009 by the BLS.

The most noteworthy thing is housing costs, supposedly flat for a year. The next noticeable item is auto prices supposedly jumping at an annualized rate of 19.9% over the last 3 months. In the wake of clearance sales, rebates, incentives, cash for clunkers, etc., does anyone believe that?

Huge Housing Errors In CPI

The biggest error in the the CPI is housing and that error is compounded because housing has the highest weighting in the CPI.

I talked about the effect of housing on the CPI in What's the Real CPI?

Case Shiller CPI vs. CPI-U



click on chart for sharper image

The above chart is courtesy of my friend "TC".

CS-CPI fell at the fastest pace on record to measure at -6.2% year over year (YOY). Meanwhile the government’s CPI-U declined at the fastest rate since the 1950s at a -1.3% YOY pace.

The diverge is to due to the government’s housing metric of Owners’ Equivalent Rent (OER) continuing to show price increases (+2.1% YOY) vs. Case-Shiller data showing price decreases (-18.1% YOY). In fact, since the housing market peak in June 2006 OER is up +7.6%, while the Case-Shiller index is down -32.6%, an amazing 4020 basis point divergence!

CS-CPI Year over year has now fallen for 8 consecutive months and 11 of the past 15. High Year over year comparison data points for the next several months will likely result in CPI deflation coming in at -7% to -8% in the coming months.

The Real Yield

Bloomberg reported "The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.10 percent today, compared with an average of 2.74 percent over the past 20 years."

Based on actual housing costs as measured by Case-Shiller, I have the real yield at an astonishing 9.92%, the highest in history. That number is achieved by subtracting CS-CPI at -6.2 from the current 10-year yield of 3.72).

Inflation Fears and Huge Supply Weigh on Prices

Many are uninterested in treasuries out of inflation fears. Real yields may be 9.92% (or 5.10% if you believe Bloomberg), but what will the rates be 3 years from now?

With the trade deficit shrinking, foreign governments will buy fewer treasuries, so the massive supply is for now forcing up yields.

Moreover, who wants treasuries at a nominal yield of 3.72% given the pervasive "bottom is in" belief in equities?

Pension plans with long-term assumptions of 7.75% are not going to buy them as noted in Calpers Rolls the Dice, Gambling that Riskier Bets will Restore its Health.

Reflation Trade Back On

If the bottom is in and Bernanke's reflation efforts work, treasuries will not do well. Otherwise, 3.72% nominal and somewhere between 5% and 10% real yields are far more attractive than most participants seem to think, at least for now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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