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All eyes on the US economy
A few observations related to the US economy which might give us a better sense of where we are in the cycle.
• We are starting to see some signs that the US housing market is entering another slow period after improving briefly due to government stimulus. Existing home sales have been slowing in recent months and new home sales activity hit a new record low of 308K annualized units in February, after marking a previous low the prior month. Overall, sales dropped 2.2% from an upwardly revised decline of 8.7% in January. This series has been contracting since November despite generous tax credits and an improved macro-economic outlook.
• Commercial real estate prices rose in February for the third straight month. The Moody’s CRE price index is a repeat sales index like Case-Shiller—but there are far fewer commercial sales—and that can impact prices. Note that commercial real estate prices are now back to the level seen in 2001 (when adjusted for inflation). But a quick glance at the fundamentals of the market in 2001 suggests that the current recovery in prices is unsustainable. For example, today there are 3 million less people working and office vacancy rate is 10 percentage points higher than it was in 2001. There is much more supply today than earlier in the decade and credit is much less available.
• As a preview of what we might see in the coming years, U.S. Treasury yields rose notably this week after the government’s auctions of two, five, and seven-year notes were all met by weaker demand than usual. Bid-to-cover ratios, a gauge of demand, was lower than it has been in four months.
• It is interesting that while the US debt market is starting to show some early signs of distress, emerging credit markets were able to shrug off turmoil in some fiscally strapped nations, posting gains over the past few weeks.
• Bernanke made it very clear that he wants the Fed’s balance sheet to return to its pre-panic form, when it was composed mostly of Treasury securities. However, that might be easier said than done. The composition of the maturity dates of the securities held by the Fed will make it difficult to deflate the Fed books in the near term. The Fed has roughly $1.25 trillion in securities maturing in more than 10 years, accounting for about half of its balance sheet. For comparison, there are between $150 billion and $200 billion in securities that will mature over the next year. It will take years to return the balance sheet to its pre-crisis size.
Benjamin Tal
Senior Economist
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April 7th, 2010 at 10:34 am
I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.