Rosenthal's Economic Update

Thought for the Week 7-29-09

Time Out

 

We work and we push and we stress and we work some more.

Yes, we have to work to live….but do we have to live to work?

 

Each day, amid all the pressures we face, we still get to make choices.

Choices about how to spend our most precious and finite asset….our time.

We can choose to carve out some of our time to attend to ourselves….to strengthen and to heal ourselves.

 

When did we last take a quiet walk alone with our thoughts?

What was the last book we read?

Yoga…meditation….writing in a journal….visiting with a dear friend.

When did we last allow ourselves the pleasure of some time well spent?

 

In the weeks ahead, may we choose to take some time out to recharge ourselves. 

May we each set aside time…to relax….to play….to laugh….and to renew.

And may we remember that taking time to refresh our soul can bring light to even the darkest of times.

 

Have a good week.

Economic Update 7-29-09

Friends and Colleagues

 

We are wandering in the economic woods…but where are we?

This week, the Economics Group from Wells Fargo Securities shares some current guideposts to help us find our way.

 

First Some Good News:

·        Earnings have generally beaten expectations, with cost cutting more than offsetting disappointing news on revenues.

·        Layoffs have slowed, as evidenced by declines in unemployment claims and claims for unemployment insurance.

·        Mass layoff announcements tracked by the Bureau of Labor Statistics show some tentative signs of topping out.

·        The Leading Economic Index rose 0.7% this month, which marks the 3rd consecutive gain, as 7 of the 10 leading economic indicators improved during each of the past 3 months.

·        Sales of existing homes rose 3.6% in June, marking the 3rd consecutive monthly increase, with foreclosures and short sales accounting for only 31% of total residential sales.

 

On The Other Hand, Some Bad News:

·        While layoffs may have peaked, hiring shows no sign of picking up.

·        The unemployment rate reached 9.55% in June, as ~6.4 million jobs have been lost since the beginning of the recession.

·        Real GDP fell in Q2 at a 1.6% annualized rate, its fourth consecutive decline, but the pace of the decline is slowing.

·        The Consumer Confidence Index fell 5.5 points to 49.3 in June after jumping nearly 14 points in both April and May.

·        It is likely that a considerable backlog of foreclosed and soon-to-be foreclosed houses will hit the market later this year and in 2010.

 

Consumer Credit – Lower Future Demand

·        Consumer incomes, confidence levels and price expectations are in decline.

·        Well Fargo projects 1.7% growth in real disposable income for 2009-2010 vs. 3.2% in 2006-2007.

·        They also project “persistently high unemployment rates”.

·        With consumer confidence down, Wells Fargo projects higher saving rates leading to reduced future demand for credit.

·        Lower expected appreciation of assets like housing that are typically financed by credit, has further reduced demand for financing. 

Some Economic Projections from Wells Fargo Economics:

·        “The unemployment rate will likely rise upwards of 10% in early to mid 2010.”

·        “With inventories at historic lows, production is now set to ramp up in the 3rd quarter which should help to push GDP into positive territory.”

·        “The economy may expand during the 3rd quarter, but consumer demand is not improving.”

 

Three Key Points about the Fed’s Current Strategy

1.      Chairman Bernanke has mentioned that “these policies would help to raise short-term interest rates” which is the traditional approach to a monetary policy aimed at limiting liquidity.

2.      The Fed’s attempts to reduce liquidity will impact the relative returns for all instruments it attempts to sell.  

3.      The final issue is not if there is a plan, but if it will be implemented in a timely manner. We know the Fed has a plan…but will they implement and follow-through?

Thought for the Week 6-1-09

Integrity

Every day we give our word, and we ask to be trusted.
But have we earned the right to be trusted?

Each day of our lives, we are building our name and our reputation.
Each day we have opportunities to build or destroy a foundation of trust from others.
Each day we get to choose what kind of person we are to be.

When we give our word, do we follow through?
When we mess up, do we reach for excuses, or do we embrace our mistakes and work to make amends?
When we have a choice of what to do, do we choose to do the right thing?

In the days ahead, may each of us embrace the opportunity to earn a good name by doing the right thing.
May we serve as an example for those around us.
May we understand that at the end of our days, our name and our reputation are all that we ever truly owned.

Have a good week.

Economic Update 6-1-09

Friends and Colleagues

Summer is in the air, and with it, a sense of muted optimism…or so we are told.  Scott Anderson of Wells Fargo Economics wonders aloud whether  the recent rise in Treasury rates may be foreshadowing the end of the “recovery”.  Read on to see why we need to keep our eyes on treasuries in the weeks and months ahead. 

 

Recovery?

By certain measures, we have been in a recovery recently.

·      The S&P 500 has gained about 34% since its March low.

·      Initial jobless claims seem to have peaked at the end of March, and have been trending down since then.

·     Consumer confidence has jumped to 54.9 in May from 25.3 in February.

 

Lots of green shoots, and life is all good…right?!

 

But…

Anderson warns us that rising long-term Treasury yields have the potential to wilt the green shoots.

He cautions that rising rates have the potential to cancel out the Fed’s effort to lower the cost of borrowing for consumers and businesses.

He projects that 30-year mortgage rates moving over 5.0% will slow refi and home purchase activity.

This would cause house prices to fall further, and would keep consumer spending at a tepid level.

He worries that if these things occur, it would cause a downgrade for the overall economy.

 

Watch That 10-year Treasury Yield!

Anderson contends that watching the yield on 10-year Treasuries can be a good single indication of the direction of the economy as a whole.

As examples, he cites the following:

·      If the dollar takes a dive because the Chinese are getting nervous about the federal debt or U.S. inflation, it will show up in rising 10-year Treasury rates.

·      If the Federal government decides to change its spending, tax, or borrowing plans, it will cause rising 10-year Treasury rates.

·      As the Fed adjusts or even thinks about adjusting its monetary policy and Treasury purchase programs, the impacts are immediately reflected in the ten-year Treasury yield.

 

Speaking of the Fed Buying Treasuries….

Per Anderson, the recent run-up in Treasury yields is partly due to the belief that the Fed’s commitment to buy $300 billion in Treasuries by this fall will not be enough to stem the flood of new supply as the government tries to borrow its way to prosperity. Resulting speculation says the Fed may soon have to expand its Treasury purchases to keep the recovery alive.

 

And About the Fed Buying MBS….

As an alternate strategy, Anderson suggests the Fed could increase its purchases of mortgage-backed securities (MBS).

·      The Fed has already purchased $427.6 billion of agency MBS.

·      They have current commitments to buy up to $1.25 trillion this year.

·      This has helped lower spreads between the ten-year Treasury and MBS.

·      This keeps banks from having to pass along the full increase in Treasury yields onto the residential mortgage market.

 

Is the Cup Half Empty or Half Full?

Anderson concedes that a rise in long-term bond yields and a steepening yield curve is not always a bad thing.   

It can also signal renewed economic growth and recovery.  

However, this time he contends the cup is half empty, as he believes the recent rise in rates has been more about fears of future inflation and the dollar, federal borrowing and Fed purchase programs.

 

Anderson is an economist….which means he may be right, and he may be wrong.

What do you think?  Will the consumer recovery continue, or are more dark clouds looming on the horizon?

 

As always, our saga continues, so stay tuned…..

Thought for the Week 4-21-09

Could it be that These Are The Good Old Days?

It sounds crazy! 
We are scared....we are in financial distress....we are in pain...so where's the good?

Aren't we also talking to each other more?
Aren't we now connecting more about our life issues, fears and hopes rather than material issues like our new car or latest remodel?

Young people today are starting to be more interested in making a difference, whereas a few short years ago when it was all about making big bucks.

Our generation has known no real global adversity.
But during the Depression and WW II, our parents showed that adversity can bring out the best in us.

So now it is our chance to respond to our global crisis by giving the best that we have to offer.
This crisis will only truly subside when we have learned that life is not all about me doing for me.....it is all about us doing for each other.

In the days and weeks ahead, may each of us choose to look for ways that we can help.
May we reach out to those we know and to those we don't.
May we offer our own unique talents and gifts to help someone else who is struggling.
And by doing so, years from now may we be able to look back on these days of challenge, and say that those were the good old days.

Have a good week!

Economic Update 4-21-09

Friends and Colleagues 

This week in the midst of continuing economic madness, we share some thoughts from a surprisingly upbeat economist. 
Scott Anderson of Wells Fargo Economics suggests words like: "optimism, rebound, renewal, and recovery" are now being used in conjunction with our economic and financial data.  
Read on to see why he believes the seeds of recovery have been planted.

Markets Are Up; Consumers Are Gaining Confidence

Stock markets around the globe are up substantially from their lows:

• Germany +26%
• Japan +24%
• China +48%
• US +34%

Are these sustainable rallies or Bear Market bounces?  Only time will tell......

University of Michigan's Consumer Sentiment index jumped in April to 61.9, up from its November low 55.3.
So we are feeling better about things....aren't we?!?

Anderson projects a rising likelihood that the economy will be growing again, perhaps as soon as Q3 of this year!

Housing Is On the Rise

Velocity of existing home sales is similar to a year ago, and in some states, substantially higher than a year ago.
Many of these are foreclosed and distressed sales, but Anderson contends the market is working as intended to clean out existing inventories and restore balance to supply and demand.

• Per the California Association of Realtors, existing home sales were up 83% Y-O-Y in Feb, and have been rising strongly for the past 11 months.
• California unsold inventory of existing homes has fallen to just 6.5 months of supply.
• Sacramento and San Diego unsold inventories have fallen below 4.0 months of supply.
• Lower-priced areas with substantial foreclosure and distressed sales activity are showing the largest gains in sales velocity.

While the press has focused on fiscal cuts and financial stimulus, the housing market in many areas has been quietly repairing itself and building a foundation for growth.

Deflation!

Consumer prices just declined year-over-year for the first time in 55 years!!
Anderson shares that he never thought we would see this day with a money system that is backed only by the faith and credit of the U.S. government, not a hard asset like gold.
He believes the ability of the Fed to increase the money supply to any level it sees fit should be insurance enough to keep deflation at bay; nevertheless, we now have deflation.

What Are the Impacts of Deflation?

Deflation, if severe, can trash the Fed's ability to reduce real interest rates, since nominal interest rate reductions can be offset by declining prices.
Deflation can also cause consumers and businesses to hold off on purchases if they believe prices will always be lower in the future.
If this behavior took hold on a widespread basis, it would be an economic disaster.

So What Lies Ahead Today?

According to Anderson, disaster does not appear to be in the cards this time.
He contends deflation will only become a problem if people believe it is here to stay.
He even projects that a little deflation is actually doing some good, as everything from gas & groceries to housing appears more affordable again, giving consumers much needed spending power.
If consumers see this as a temporary price cut, they will be looking to snap up merchandise today, before the sale ends.
Anderson believes this is the case, as consumer confidence improves and retailers report somewhat brighter sales trends.

Well, there you have it...one upbeat economist's opinion in the middle of the storm.
So, what do you think?

As always, stay tuned as our saga continues.........

Thought for the Week 3-23-09

Hey, How Are You?

We all know the age-old ritual....
"Hey, how are you?"
"I'm fine thanks....How are you?"

But today it seems to be a different story.
"Hey, how are you?" has taken on new meaning given the current state of the world.
Today we are really asking...How are you holding up?  Do you still have a job?
Do you have enough business to get by?  How long until you run out of cash?

Today, when we ask the question, we really want to know....How are you?
Many times we can see the answer written on their face.
Times are tough....business is challenging....cash is tight.

Asking the question and caring about the answer is one way we can reach out to help others.
And today, who can't use a little help?

In the days and weeks ahead, may we each take the time to truly listen when we ask, "How are you?"
And may we remember that despite our own challenges, each day is a new opportunity to help someone else.

Have a good week.

Economic Update 3-23-09

Friends and Colleagues 

This week, in light of the Fed pumping a massive amount of liquidity into the system, we consider whether we should be bracing for hyper-inflation in the foreseeable future.  Scott Anderson, Senior Economist at Wells Fargo Economics shares key reasons why we should currently have No Worries on the inflation front.

1.  We Are Still in a Deep Recession

• Leading economic indicators plunged once again in February, after two months of gains.
• Job losses are not subsiding.
• The IMF now projects the global economy to contract 0.5% to 1.0% this year, the worst global performance in 60 years.
• International trade is declining at a rapid pace.
• Recessions do not bring on inflation.

 

2.  Fundamental Supply and Demand

• Basic economics tells us that inflation occurs when there is too much money chasing too few goods.
• Today, goods are way too plentiful, and demand is low.
• Per Fed data, US Industrial capacity utilization slumped to 70.9, a new record low.
• High Supply and Low Demand does not add up to inflation.

3.  Unemployment

• When there is excess slack in the economy like today, unemployment rises and inflation falls.
• Conversely, when unemployment falls below the full-employment level of 4.5% to 5.0%, inflation rises.
• Currently US unemployment is at 8.1% and projected to rise to 9.5% by year end.
• High unemployment does not lead to inflation.

4.  Wages Remain Low

• If wages are increasing at an increasing rate, this can put upward pressure on prices.
• Current data on wage trends point to decelerating wages ahead.
• Low wages do not lead to inflation.

5.  Increased Government Spending and Fed-sponsored Liquidity

• Yes, the Fed is pumping $trillions into the economy....but demand remains a key ingredient for inflation.
• The underlying premise for inflation is too many dollars chasing too few goods.
• Monetarists tell us that: The Money Supply x The Velocity of Money = Nominal GDP.
• In other words, if velocity of money (the amount of times the money supply circulates in the economy) is stable, then more money in the economy must equal higher prices.
• Therefore we may think that inflation is always linked to the quantity of money in the system.
• However, today while the money supply is growing, the velocity of money (the amount of times the money supply circulates in the economy) is still declining.
• As long as demand for goods remains low, money supply growth should not lead to inflation.

Conclusion:

Currently, we do not have the ingredients needed to ignite inflation. 
In fact, a little inflation today would be a welcome sign that the economy is turning. 

The critical issue will come down the road when today's trends have turned around. 
Will the Fed be proactive about draining liquidity out of the marketplace before inflation becomes a problem? 
We can only hope that they will.

As always, our saga continues, so stay tuned......

Thought for the Week 2-17-09

Resilience…..

We are surrounded by chaos…madness…crisis.
The news is depressing…and intoxicating.

Our conversations are consumed with economic woes, jobs lost, wealth vanished.
Unfortunately our very words give strength to our pain and fear.
Our conversations allow us to bond with one another…but they also allow the virus to spread.

What if we were instead to talk of the opportunities and gifts that we still have?
Do we have our health?  our friends?  our families?  our unique talents?

We may be down, but we are just getting started!
After all, aren’t we the Rockers of the 50’s…the Hippies of the 60’s…the Discos of the 70’s…MTV of the 80’s?
We are children of innovation….creators of new ideas and new opportunities.

Going forward it won’t be business as usual….but was it ever?
We thrive on change….so now instead of buying the next new-thing, we get to invent it.
Our future will be what we create.

In the days and weeks ahead, may we be empowered by our resilience. 
May we embrace the opportunity to look at ourselves anew, and to create our own tomorrow.   
May we boldly use this crisis to bring forth the very best that we have to give. 

Have a good week!

Economic Update 2-17-09

Friends and Colleagues

Our journey through the economic darkness continues.  This week we share some thoughts from last week’s Mortgage Bankers Association (MBA) Conference in San Diego.  We also hear from Eugenio Aleman of Wells Fargo Economics regarding the pending stimulus package, and what we really need to get the economy back on track.

 

Random Sound Bites from the MBA CREF Conference

• Some commercial real estate lenders who intend to be active in 2009 include:  Symetra, John Hancock, Prudential, TIAA-CREF, Aviva, and One America.
• Wachovia research projects a 30% drop in CRE value from peak to trough.
• Going forward, the focus will be on due diligence and sustainable cash flow.
• Community banks may lead the way out of the storm.
• The “who” is back in underwriting; character is once again important.
• There is upward pressure on property operating expenses.
• When CMBS comes back, issuers will have to have some skin in the game.

Sound Bites from a panel of CMBS Special Servicers

• CMBS delinquencies are projected to rise by 6/10 from 1.4% to 4.4% of loans outstanding.
• Approx. 70% of CMBS delinquencies are from 2006 and 2007 issuances.
• CMBS loans on the “Watch List” have risen from 1% to 16% of loans outstanding.
• CRE had its share of “sub-prime” loans that were made to borrowers who were not creditworthy.
• Commercial mortgages as a % of GDP rose from 10% in 1996 to 18% or $2.5 trillion today.
• “We are not over-built like we were in the 1990’s, but we are over-loaned, by approx. $1 trillion.”

Aleman’s Thoughts on the Fiscal Package

• Some of the provisions are “useless” or even dangerous for the future sustainability of economic growth.
• Examples include tax incentives for buying a house or a car in 2009, which will spur current activity, but will ultimately just delay the day of reckoning in certain industries.
• Tax breaks for households run the risk of being saved or used to pay down debt instead of being used for consumption.
• The best strategy for a sustainable recovery must create jobs directly.
• If possible, it should be done in partnership with small businesses, since they have the potential to create the most jobs.

Per Aleman, The Real Underlying Issue is Confidence

• Investors have lost so much wealth that they no longer have confidence in the U.S. financial system.
• Until we fix our financial system it will be very difficult to bring back confidence in the market.
• Consumption has plummeted since people believe things are going to get worse in the future.
• Unless households see a turnaround in the U.S. labor market, confidence is not going to return regardless of how many tax incentives and rebates we get.
• Restoring confidence in the future is the key to restoring sustainable economic growth.

 
Well, that all sounds reasonable….but what will it take to restore our confidence in a better tomorrow?
If you have any good answers, please e-mail them directly to Washington.

As always, our saga continues, so stay tuned……