Grimshaw vs. Stern

John Jourden may have beaten me to the punch, but I still feel the need to compare, and share with everybody, the New York City Department of Transportation's choice for its new street furniture -- designed by Britain's Nicholas Grimshaw -- with Chicago's shelters designed by Robert A.M. Stern, which I posted briefly about a couple years ago.



Grimshaw's design (above) is "made of stainless steel, anodized aluminum, and tempered glass," according to a news brief at Architectural Record. The roof is cantilevered glass, supported by tapered steel sections. A piece of cantilevered glass in the foreground allows for additional shelter from the wind, while the back portion clearly indicates the shelter's location in the city.



Where Grimshaw's design trumpets its better materials (no painted finishes or plastics, which are "less durable over the long term") and neutral impact (it touches the ground at two spots due to a steel plate anchored under the pavement), Stern's bulky shelters are primarily painted steel and aluminum, they touch the ground at six points (sometimes more), and they're bolted through small concrete pads (for leveling) to the sidewalk below, meaning they aren't so much anchored to the ground as set upon it.

Unfortunately, the Chicago image illustrates that the Stern shelters just might be the right fit for a city that requires bulky, pseudo-wrought iron fencing to define parks and other open spaces, and that feels the need to erect badly designed obelisks at every point of entry into a neighborhood, a la Lincoln Square's above.



But more than the design of these things, what's really irked me lately are the free-standing, two-sided billboards labeled "City Information." As of yet have I seen one with any useful information, like a map or a list of places of interest in the immediate vicinity. Instead, we're bombarded with more ad revenue for JC Decaux, in the case via Heineken.

The above image was taken from Hello Beautiful!, where Edward indicates that some actually do have maps. These appear to be the minority in the city's ever-increasing Ad-scape.

Fed in a Quandary

The minutes of May 10 FOMC meeting were released today.
Here are a few key snips:

Participants discussed in some detail inflation expectations--a potentially important factor influencing future inflation trends. Some surveys suggested that inflation expectations had risen in recent weeks, but others implied that expectations were little changed.

On balance, participants judged that inflation expectations had risen somewhat--a development that would have to be taken into account in policymaking and warranted close monitoring--but remained contained.

Although the Committee discussed policy approaches ranging from leaving the stance of policy unchanged at this meeting to increasing the federal funds rate 50 basis points, all members believed that an additional 25 basis point firming of policy was appropriate today to keep inflation from rising and promote sustainable economic expansion.

Recent price developments argued for another firming step at today's meeting. Core inflation recently had been a bit higher than had been expected, and several members remarked that core inflation was now around the upper end of what they viewed as an acceptable range. Moreover, a number of factors were augmenting the upside risks to inflation: the surge in energy and commodity prices, some recent weakness in the foreign exchange value of the dollar, and the possibility that the apparent increase in inflation expectations could, if it persisted, impart momentum to inflation

At the same time, members also saw downside risks to economic activity. For example, the cumulative effect of past monetary policy actions and the recent rise in longer-term interest rates on housing activity and prices could turn out to be larger than expected. Still, it seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year.

Given the risks to growth and inflation, Committee members were uncertain about how much, if any, further tightening would be needed after today's action. In view of the risk that the outlook for inflation could worsen, the Committee decided to repeat the indication in the policy statement released after the March meeting that some further policy firming could be required.

Members debated the appropriate characterization of inflation expectations in the statement. Low and stable inflation expectations were key to the attainment of the Committee's dual objectives of price stability and maximum sustainable economic growth. However, the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the range seen over the past couple of years, and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as "contained."

Dow Jones summed it up as follows:

*DJ FOMC: May Minutes: Upside Inflation, Downside Econ Risks
*DJ FOMC: Debate Ranged From No Fed Funds Change To 50BP Hike
*DJ FOMC: Rise In Price Expectations 'Worrisome' But Small
*DJ FOMC: Inflation Expectations Warrant 'Close Monitoring'
*DJ FOMC: Staff Forecasts Inflation To Slow Later In '06
*DJ FOMC: Unsure How Much 'If Any' More Tightening Needed
*DJ FOMC: Lagged Rate Impact On Housing Could Be Larger
*DJ FOMC: Lower Dollar Could Add To Inflation Pressures

Fed in a Box

Those minutes prove the Fed is in a box and is essentially clueless about what to do. Some wanted to pause while others wanted a 50BP hike. In the end they all agreed to go down on the sinking ship together by agreeing to agree. It was a unanimous vote in favor of a 25 BP hike.

At least in the UK we see policy makers willing to dissent. The last BOE meeting had a three way split with some voting to pause, some to hike, and one to cut.

It is notable that finally after 16 consecutive rate hikes the Fed finally put a 50 basis point rate hike on the table just as housing is getting crucified in many places. They are also worried about inflation expectations while at the same time unsure if any more hikes are needed.

I have said it before and will repeat it again. The lagging effects of 16 consecutive hikes, in light of action in housing as well as rising bankruptcies makes it extremely likely the Fed has already overshot.

Given that this Fed created the housing bubble in the wake of a stock market bubble the Fed also helped create, why anyone thinks the Fed has any clue what they are doing is simply beyond me. Past bubbles and those minutes clearly prove the Fed is guessing. Then again, given that the greatest liquidity experiment in the history of mankind was openly undertaken by numerous central banks over the last few years (most notably the Fed and the BOJ) it should not be too surprising that the Fed is guessing.

We can top that off with $Ben Bernanke who actually believes price targeting can work in a global economy burdened by peak oil, outsourcing, trillions of dollars of derivatives floating around, and interest rates ranging from 0% in Japan to 2% in Europe to 5% in the US. All I can say is that it can't be done.

Bernanke is the wrong person for the wrong job at the wrong time. For more discussion on the silliness of price targeting, please consider Inflation Monster Captured. Targeting prices is like trying to catch your tail. The job is wrong because the job should not exist. The man is wrong because price targeting can't work. The time is wrong simply because it was never right and never will be. The Fed should be abolished and the market should set rates. The market can not possibly do any worse than the bubbles blown by the Greenspan and Bernanke Fed.

The Fed is in a quandary because of the mess they helped create. There are no good solutions from here, yet the talk from Wall Street is as if some sort of miracle soft landing that keeps the consumer spending without going bankrupt is about ready to happen. No chance.

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

(Almost) 2 Years Later

Millennium Park opened on July 16, 2004. At that time the park looked anything but complete, most apparent in two parts: Anish Kapoor's "Cloud Gate" had noticeable seams from the spot welding of the numerous panels and the Lurie Garden's plantings were but a hint of its future growth.

So, now nearly two years later, how are "Cloud Gate" and the Lurie Garden?



"Cloud Gate" was officially dedicated earlier this month, the Mayor declaring May 15 Cloud Gate Day. Of course, polishing out those welds took time, and the process kept the sculpture under wraps for much of the last two years and raised its price tag to $23 million. But, it looks amazing and visitors to the park flock to it, even on gray days, as you can see.



The Lurie Garden, as you can also see, has fleshed out rather beautifully. And thankfully, the city is helping by providing a helpful guide to the plant life of the garden.

(Garden link via Gaper's Block)

Florida Numbers

Following are "The Numbers" from Mike Morgan at MorganFlorida.
The first set of numbers are for the last 7 days. The second set of numbers are for the prior week. Sold represents a home that was under contract and has closed, while Pending sales are contracts written this week, but they don�t all close. Less than 85% of Pending listings will actually close.

• New Listings - 541/508
• Price Drops - 177/228
• Sold - 67/41
• Pending - 50/42
• Listings to Pending Sales = 10.8212.09
• Listings to Closings (Sold) = 8.079/12.39
• Open Houses � No Open Houses. Holiday Weekend.
• Sales � Nothing sold this week.
• Showings � A slow week. The only homes that had showings were those with recent price drops.
• Listings � We received 10-12 calls from new sellers, but we turned down all listing requests this week with the exception of two. The two listings we took were referrals from good clients. Moving forward we are not going to take any listings unless they are priced 2-5% under the market.
• Buyer Inquiries � A new category for the weekly report. We saw an average week for the number of inquiries, maybe even a bit up. Unfortunately, all of these potential buyers were looking for bargains. That is the first thing out of their mouth. Not only bargains, but steals. The typical caller wants a home with 4 bedrooms, 3 bathrooms, 2 car garage on an acre with a pool for under $300,000. Me too.
• Inventory � Still building, but we did see the rate of build-up slow down a bit this week. Please don�t take that as very much of a positive sign. We are still seeing 10 listings for every contract.
• Advertising � The deadline for the next issue of the Real Estate Book is in one week. If you want to feature your home in the next issue, the cost is $450 for a full page or $150 for a one third page. We only run full page ads with either 1, 2 or 3 homes per page, as compared to most agents that crowd in 9-12 tiny listings.
• Rental Market � We turned down all requests from flippers that want to rent. The rental market is flooded with flippers trying to salvage something out of their investments. Unfortunately, there are far more vacant homes than renters.
• Home Builders � The builders are lowering prices and offering a variety of incentives.
• Suggestions � Selling Agent Bonuses. These are still the homes that are getting the most showings. If you must sell, I suggest dropping the price now versus later. The market is getting softer. If you wait, prices will continue to drop and you will be trying to catch a very sharp knife.

Possibly the most interesting factoid of Mike's Email is his refusal to take listings that are not UNDER priced:

We turned down all listing requests this week with the exception of two. The two listings we took were referrals from good clients. Moving forward we are not going to take any listings unless they are priced 2-5% under the market.

The situation in Florida will soon spread to all of the other bubble areas.
You can see it already with rising foreclosures in Denver, Ohio, Indiana, and now California.

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

How to buy a home

I found some very practical advice today from Charles Hugh Smith.
It was on How to buy a $450,000 home for "only" $750,000.

I cleaned up his accompanying image a bit in Photoshop and it appears below.



Following are the words of wisdom from Mr. Smith about "The cutting-edge secrets to buying real estate at 30% to 50% above market value"

• Appoint a Federal Reserve which flooded the nation with virtually unlimited money supply even as it lowered interest rates to historic lows
• Lower lending standards to basically zero so even those with poor credit and no cash can buy a house with no money down and no documented history of financial discipline
• Enable investors to buy new condos and houses with maximum leverage so that 40% of all new homes are purchased as investments
• Lower lending reserves requirements to the lowest levels ever, so lenders need not be encumbered with onerous standards like having cash on hand to cover bad debts
• Enter into an unspoken agreement with our Asian trading partners in which our homeowners can borrow 105% the value of their homes to buy Asian-made consumer goods, and our trading partners will buy all our depreciating long bonds at low rates of return so mortgage rates stay low
• Keep wage increases down to basically zero so consumers count on re-financing their homes to pay for vacations, college, new cars and boats, etc.
• Enable a 10-fold expansion of mortgage-backed derivatives and various exotic financial instruments so that trillions of dollars in mortgages can be tranched, sliced and hedged, giving the financial markets the false impression that the risks have been lowered, even as they've actually increased to unprecedented levels
• Enlist an army of Wall Street and media cheerleaders to promote the notion that "this time it's different" and "housing never drops in value," lulling the unsuspecting into believing that the business cycle and the laws of supply and demand have been officially revoked
• Encourage builders to build up to 10 times the number of units which sell annually, insuring massive overbuilding (over-supply).
• Rig the inflation measurements (CPI, etc.) to hide the actual inflation rate (close to 8%)

Truth in thievery:
Since I blatantly took Charles Hugh Smith's image he can oblige by posting my version (or perhaps an even better one) so by the time you read this, the versions may or may not be the same. Anyway, a tip of the hat goes to Mr. Smith for a clever idea, well thought out.

Addendum:
I was away on vacation for about the last 12 days. I did not know if I could even send any blogs at all. Wireless reception was piss poor where I was staying. It only worked in the lobby. It would not work in our room 300 feet away or even the bar lounge 100 feet away. That might explain a lack of responses to some questions I received in the while I was gone. I should be back on a more orderly schedule shortly.

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

Mies-on-a-beam

Walking past the Federal Center in the Loop over the weekend, I couldn't help but notice the vertical scaffold supports that seem to grow from Mies van der Rohe's buildings, faithful to the old rationality in their even spacing and symmetry across the facade. The image below is from a January piece by Lynn Becker where the Dirksen Building was being worked on. Today, the Klyuczynski Building is undergoing the same facade restoration, to bring back the exterior's black beauty.



This photo above looks almost like a realization of Lewis.Tsurumaki.Lewis' early speculation, Mies-on-a-beam. That project (published in Pamphlet Architecture 21: Situation Normal), "transforms the ornamental curtain wall I-beams into wheel tracks for a pair of mobile grass platforms linked to the window washing hoist."



This speculation proposed to bring the ground floor plaza to all levels, acting like an executive putting green or place for a smoke break. It also creatively envisioned an actual function for the ornamental I-beams, pieces that Mies used to express the structure encased within concrete (for fire reasons) behind the facade, a lie that has not been lost on historians of Modernism. Perhaps this project, if realized, would turn the lie into a sort of truth.



In Chicago, being that these buildings are owned and occupied by the increasingly-secretive and secure US government, a similar vertical replication of the plaza below would probably be unthinkable, but perhaps other uses could be found for this device. Unoccupied, these green platforms could become moving landscapes that give the occupants a slice of landscape for a few minutes each day. Or like Diller + Scofidio's winning proposal for Eyebeam, the platform could double as a surveillance device, giving the public a glimpse into the building's inner-workings, a public relations stunt to raise people's trust in the federal government. Or the platforms could brush water soluble paint onto the exterior as they rise and fall, creating an ever-changing striping on the building that washes off with each rain. Or maybe ...

Monday, Monday

My weekly page update:

Reford Gardens Pavilion by Atelier in situ.

The updated book feature is Openings Spaces: Design as Landscape Architecture, by Hans Loidl and Stefan Bernard.

Some unrelated links for your enjoyment:

Lee Bey: The Urban Observer
The new online home of the former Chicago Sun-Times architecture critic, former Deputy Mayor, current director of governmental relations to SOM, writer, lecturer, and man about town Lee Bey. (added to sidebar under chicago)

Two-part interview with Mike Davis
Geoff Manaugh at BLDGBLOG interviews Davis, the author of the most recent Planet of Slums but also the well-known City of Quartz and Ecology of Fear. Part one is above and part two is here.

Issue 2
The latest newsletter for Architecture 2030.org, its biggest news being the upcoming vote by the US Conference of Mayors on a resolution calling for cities to adopt the 2030 Challenge (PDF link) for all city funded buildings.

International Carlo Scarpa Prize for Gardens
This year's prize is given to Val Bavona, "a short, rugged valley high in the mountains of Canton Ticino, Switzerland, an 'awesomely beautiful' place, gouged by the glacier, shaped by water and stone, in which a community (about a thousand people) has come to terms with the power and harshness of nature and over time has developed the ideas, the attitudes, the actions and the artefacts of human life when pushed to its limits." (via Pruned)

AMBITIOUS MAN WANTED

What better way to spend your Memorial Day holiday than writing a 100-word essay on why you're an ambitious architect.

Men's Health is looking for a few hard-charging career guys to be our poster boys for a three-part article about the sacrifices men make on the job, and how those impact their homelife and health. He should be an MH guy, fit and ambitious, who's willing to allow our photographers track him literally everywhere for a few days and record his hectic work life, and then hang with him in his interactions with family and/or friends; we'd print a selection of photos as a kind "24-hours in the life" essay to run with the articles. If you fit the bill, please e-mail your name, address, e-mail, age, and 100-word essay with a recent photo of yourself to MHonline@rodale.com with the subject line AMBITIOUS GUY. Or you can snail mail it to AMBITIOUS GUY, C/O MEN'S HEALTH, 33 E. MINOR ST., EMMAUS, PA, 18049. Immortality awaits (at least for the three months this fall).

Greenspan Predicts Housing Bust

On May 21st Greenspan all but assured a housing collapse was coming with his statement Stable prices replacing boom

Former Federal Reserve Chairman Alan Greenspan said the five-year housing "boom is over," though prices won't fall nationally.

"We're not about to go into a situation where prices will go down," Greenspan, 80, said in response to questions Thursday evening at a reception in New York hosted by the Bond Market Association. There is "no evidence home prices are going to collapse."

Greenspan echoed comments earlier in the day by his successor, Ben S. Bernanke, who said housing is undergoing a "very orderly and moderate cooling," and that central bankers are monitoring the market to help shape their analysis of the economy's performance.

With his "permanently high plateau" call, Greenspan all but assured prices are about ready to collapse. Bear in mind there was no evidence of a Nasdaq crash in Spring of 2000 either. But given that Greenspan has been wrong at every critical juncture in his entire career, we know housing is will collape sooner or later.

Actually his position is peculiar to say the least. He claimed there was a bubble in stocks in 1994, he embraced the productivity miracle in 1999-2000 looking for upside in the economy as shown by Fed minutes, then after the bubble burst claimed that bubbles could only be detected after they pop. Now he is claiming "very orderly and moderate cooling where prices where prices will not go down". This is of course reminiscent of esteemed economist Irving Fisher's statement in October 1929: "Stock prices have reached what looks like a permanently high plateau."

Head Cheerleader

Of course Greenspan has company with his call. Please consider statements made by David Lereah, head cheerleader for the National Association of Realtors: "There is no real estate bubble.

More than 50 people turned out for an investor seminar recently hosted by Keyes Company/Realtors and held at Belaire Boca, a community of luxury condominiums and townhomes in Boca Raton.

The featured speaker for the evening was David Lereah, senior vice president/chief economist for the National Association of Realtors. Lereah is also the author of "Why The Real Estate Boom Will Not Bust & How You Can Profit From It: How To Build Wealth In Today's Expanding Real Estate Market."

Lereah was quick to make his message clear: "You don't need a boom for real estate to roar. The real estate boom is over but the real estate expansion is still here." Although homes are not selling as quickly right now, prices are still up. "There are no real estate bubbles, only balloons that expand and contract," he said.

Lereah substantiated that good news by presenting numerous facts. The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased tenfold during that time. Low mortgage rates resulted in a refinancing boom, as consumers became more comfortable with the process.

He said the real estate boom was caused by factors such as lenders being able to reduce financing costs; baby boomers reaching their peak earning years and trading up or buying second, third and vacation homes.

"Forty percent of all home sales in 2005 were second homes - investment properties and vacation homes - compared to about 9 percent 10 years ago," Lereah said.

"Real estate is not an irrational investment, but speculators purchased irrationally during the boom, especially in areas like Miami. This drove prices up, and many speculators took out interest-only loans. This produced a vulnerable real estate market," Lereah explained. "In 2006, we are cleansing the market of speculation."

In 2007, Lereah believes that the real estate market will continue to expand even if mortgage rates increase to 7 percent. "That is still low," he said.

He added that he is bullish on Florida, Arizona and Nevada because of even greater population increases. "The law of supply and demand works."

All of Lereah's real estate investments are in condominiums and townhomes because he doesn't want to be involved in maintaining them. "If you're Mr. Fix It, then it's okay to invest in a single-family home," he said.

Cheerleader Review
Let's analyze some of Lereah's statements shall we?

"The law of supply and demand works." Yes, the law of supply and demand works. It is in fact one of the reasons Florida is crashing and will continue to crash. 50,000-100,000 condos being built in Miami-Dade should be proof enough. It is why people are walking away from $80,000 deposits. The market is saturated with condos and you are still recommending them.

"Speculators purchased irrationally during the boom, especially in areas like Miami." Hmm It seems that contradicts the reasons to be bullish on Florida condos doesn't it? Besides were you admitting "irrational buying" a year ago or were you humming a different tune then?

"Forty percent of all home sales in 2005 were second homes - investment properties and vacation homes - compared to about 9 percent 10 years ago." Seems to me this is evidence of a bubble. Who hasn't bought that is going to do so now at these inflated prices. Not only are rental prices 4 standard deviations above norm, purchasing second homes for investments seems wildly above normal as well.

"The 14-year real estate expansion (1991-2005) resulted in a U.S. mortgage market that increased tenfold during that time. " Hmmm, you are proclaiming a tenfold increase in the mortgage market huh? It seems you ought to be writing reasons for Professor Piggington on why this is a bubble instead of denying it.

"There are no real estate bubbles, only balloons that expand and contract." Even if this nonsensical statement was true, why would one be touting Florida, a market in clear contraction, with enormous inventory and insurance problems, instead of areas with less speculation?

"If you're Mr. Fix It, then it's okay to invest in a single-family home." Even this seems like poor advice. In every boom I have seen, condos are the last to rise, the first to fall, and heaven help anyone that buys a poorly constructed condo. You may not have to fix it yourself but some has to, and typically at rates far greater than you might find for yourself. Tuckpointing repairs and the like are horrendously expensive and that is for Chicago. I can only begin to imagine the problems in hurricane zones.

At times David Lereah appears to have a grasp of the underlying facts, yet manages to come to all of the wrong conclusions about what is happening and why. No one should be surprised by this. David Lereah is a paid cheerleader for the National Association of Realtors, not a real economist.

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

Wake-Up Call

Stephen Roach is writing about a Wake-Up Call for Central Banking. Perhaps he has himself waken up from some kind of stupor when he suddenly turned bullish on the global economy right at the market top a couple weeks ago. Let's tune in.

I worry increasingly that history will not treat the recent record of central banking kindly. Inflation may well have been conquered � a conclusion financial markets are actively debating again � but that was yesterday's battle. Over the past six years, monetary authorities have turned the liquidity spigot wide open. This has given rise to an endless string of asset bubbles � from equities to bonds to property to risky assets (emerging markets and high-yield credit) to commodities. Central banks have ducked responsibility for this state of affairs. That could end up being a policy blunder of monumental proportions. A new approach to monetary policy is urgently needed.

By focusing solely on the inflation battle, there is now risk of losing a much bigger war. That's what the profusion of asset bubbles is telling us, in my view. The great triumph of central banking rings increasingly hollow in today's bubble-prone environment.

By consciously ignoring the perils of a mounting asset bubble � a stunning reversal, of course, from Alan Greenspan's original warning of "irrational exuberance" in the stock market in December 1996 � the Fed became entrapped in the dreaded multi-bubble syndrome. Stressing that it had learned the lessons of Japan, the US central bank was aggressive in easing in the aftermath of the bursting of the equity bubble. A new Governor by the name of Ben Bernanke led the charge at the time in arguing that the US central bank should use every means possible to avoid an unwelcome post-bubble deflation � including, if necessary, "unconventional" measures aimed at targeting the yield curve, providing subsidized bank credit, and even pegging the dollar (see his 21 November 2002 speech, "Deflation: Making Sure "It" Doesn't Happen Here"). With inflation low � and the risk of deflation actually rising at the time � the price-targeting Fed had no compunction about turning the liquidity spigot wide open. And so the miracle drug that was used as the cure for the first bubble created a dangerous addiction � systemic risk, in financial market parlance � that has fostered a string of asset bubbles. Unfortunately, that addiction has yet to be broken.

When inflation is low and a price-targeting central bank pushes nominal interest rates down to unusually low levels, there are new risks to confront � namely, asset bubbles. Central banks that let economies "rip" because inflation risks are minimal, are asking for trouble. That doesn't mean monetary authorities should target asset prices. It does mean, however, that there are times when asset markets need to be taken into consideration in the setting of monetary policy. A low nominal interest rate regime is precisely one of those times.

America's Federal Reserve is increasingly isolated in arguing that asset markets should be ignored in the setting of monetary policy. In fact, its new chairman is the academic high priest of inflation targeting � embracing an even tighter rules-based approach than his predecessor. Asset bubbles are, at best, an after-thought in a strict inflation-targeting regime. Therein lies the potential for a strategic policy blunder: The US central bank has yet to develop an exit strategy from the multi-bubble syndrome that the Fed, in its zeal for inflation targeting, has spawned. Moreover, as one bubble begets another, excess asset appreciation has become a substitute for income-based saving � forcing the US to import surplus saving from abroad in order to sustain economic growth. And, of course, the only way America can attract that capital is by running a massive current-account deficit. In other words, not only has the Fed's approach given rise to a seemingly endless string of asset bubbles, but it has also played a major role in fostering global imbalances.

Central banks deserve great credit for waging a successful battle against inflation. To their credit, this war is never over � monetary authorities must always remain alert to the possibilities of a resurgence of inflation. But policy strategies have been surprisingly unprepared to cope with the pitfalls that emerge as economies near the hallowed ground of price stability. Nor have inflation-targeting monetary authorities shown themselves to be adaptable to changing circumstances, such as IT-enabled productivity enhancement and globalization. To the extent rules-bound central banks operate in a vacuum and fail to appreciate the impact of these powerful structural headwinds, they may be biased toward injecting too much liquidity into the system. The multi-bubble experience of the past six years is a wake-up call for central banks. A new approach to monetary policy is urgently needed.

I do not think that "Central banks deserve great credit for waging a successful battle against inflation" but at least most of the rest of what he had to say sounded more like the Roach I used to know. The reason there should be zero credit given to central banks for a successful battle against inflation is they did nothing to foster it. In fact they blew asset bubble after asset bubble so why should anyone give them credit for that?

Money supply exploded out of control under the Greeenspan Fed. It was only because of global wage arbitrage, outsourcing, and a productivity boom caused by the internet that inflation SEEMED low. Inflation was not low if one understands what inflation really is: growth in money supply an credit as discussed in Inflation: What the heck is it?.

Now Bernanke is even more intent on price targeting than was Greenspan. It is a policy doomed to failure as I mentioned in Inflation Monster Captured.

Sometimes money flows into houses and stock and bonds instead of goods and services. Sometimes productivity improvements mask inflation. Sometimes falling commodity prices mask inflation. Of course I am talking about "real inflation" as measured by increases in money supply as opposed to hedonically adjusted price inflation as seen through the eyes of central bankers.

The last paragraph is exactly what made a fool out of Greenspan. In the mid-to-late
1990's, "real inflation" (a rampant increase in money supply), was masked by
productivity improvements, falling oil prices, and falling prices of goods from Asia. Greenspan called it a "productivity miracle". It was a "miracle" indeed. Rampant increases in money supply fueled the 2000 stock market bubble and spawned nonsensical talk about "new paradigms". Then in sheer panic "after the bubble pops" adjustments that he likes to make, Greenspan refused to allow a recession run its course. Instead he slashed interest rates to 1%, fueling the biggest housing bubble the world has ever seen. Here we are three short years later now facing a "new paradigm" in housing, with debt levels far worse at both consumer and governmental levels.

Given that Bernanke is even more focused on prices than Greenspan was, Roach is right to be worried. Our economic policies are clearly broken and and the Fed and government spending are right at the heart of the mess. Both are to blame.

A new approach is certainly needed as there is now hell to pay for the horrid economic policies of the last 18 years.

I suggest the following.

1)Eliminate fractional reserve lending
2)Let the market set interest rates
3)Abolish the Fed
4)Rein in government spending
5)Return to the gold standard

Can this all happen at once? Of course not. It would probably plunge the US into an instant depression if it was tried. Furthermore, one can have sound money without a gold standard, gold just makes the enforcement easier(see Gold's Honest Discipline). Fractional reserve lending can be curtailed over time as can government spending. One way or another, unsound economic practices and serial bubble blowing will be halted or the market will force it at the worst possible time. The wake-up call may be loudly ringing but the big fear is that both the Fed and Congress are deaf.

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

Wind and Earth

Over at Design Observer, Justin Good waxes philosophical about beauty and the Aesthetics of Wind Farms, while over at Subtopia, Bryan Finoki draws our attention to the United States Capitol Bunker Visitors Center now under construction. Seemingly opposites -- the former above ground the latter below, one an object the other a space, the first in nature the second in a city, etc. -- these physical constructions embody two of the biggest issues today: energy and terrorism, respectively.


Middelgrunden Wind Farm in Denmark

As Dr. Good argues for the objective beauty of wind turbines and wind farms, he links to an article on the battle over a proposed wind farm off Cape Cod, Massachusetts. Cape Wind's website contends that, "Miles from the nearest shore, Cape Wind will use the clean, inexhaustible power of wind to provide three-quarters of the Cape and Islands' electricity." The main issues delaying or potentially killing the plan are environmental, like impacting bird migratory routes, and cultural, particularly affecting beachgoers ocean views.

To me, part of the problem is that these residents affected by the wind farm are so rich that they will be able to deal more easily with the soaring energy costs that will afflict everybody in the coming years. But they're potentially squashing a project that could, if successful, be an incubator for other similar projects all over the country that could help people beyond New England.

Ironically, environmentalists are pitted against each other as they try to determine if the farm would have adverse effects on birds. All the usual activists are there, but on both sides of the fence: "On the anti-wind-farm side, you have the Humane Society, Massachusetts Audubon Society, the International Fund for Animal Welfare, and the International Wildlife Coalition; on the pro-side, Greenpeace, the Union of Concerned Scientists, and the Conservation Law Foundation."

This wind farm would go a long way to reducing carbon emissions, so I'd rather see the project go ahead than not. Of course, global warming could potentially affect birds as well as humans (and lots and lots of other species), so if we take global warming seriously it points towards a decision that would have the most longterm impact.


Image from Subtopia post

Further down the coast, "the Capitol building in Washington is getting a 500 million dollar bunker installed at the foot of it's front entrance." I'm amazed that I haven't heard of this project before today, something that's been in the works since 1991. But at the same time, I'm sure that's no accident.

While the official website says the Visitors Center will "provide visitors shelter from the unpredictable D.C. weather," others believe, "It�?s not being done for the visitors. It�?s being done for the members," to shelter them from a terrorist attack.

Terrorism is one of those issues that is more emotional than intellectual for me, so I try not to say much about it here. Bryan does a good job summing things up on his page, quoting from "Survival City", but I would add that the deeper and stronger we build, the further we are from addressing the reality of terrorism, of why it's a problem and why we're a target.

Update 05.26: Just found this well-timed post over at Google Earth Blog, where somebody has modeled the Cape Wind Project and set up views from the shore to see the impact of the project. This sort of thing could be a great tool to getting the project approved as the impact doesn't appear to be nearly as bad as they think.

Chicago Square

Back in June last year I mentioned a couple projects planned for Hamburg, Germany's waterfront: a concert hall by Swiss architects Herzog & de Meuron and apartments spanning the Elbe River by local architect Hadi Teherani. These projects are part of HafenCity (harbor city), Europe's largest urban planning project taking shape south of the city center.

One ingredient in the plan is Chicago Square, so named as Hamburg is one of Chicago's sister cities and because, "in May 2005, the Free and Hanseatic City of Hamburg invited five renowned architectural firms from Chicago to put forward their blueprint ideas for Chicago Square, which is situated at the eastern end of Baakenhafen harbour."


The five renowned architects

"The idea of creating a Chicago Square with a high-rise skyline as the eastern entrance to HafenCity at the head of Baakenhafen harbour, and of using American architects�? know-how to achieve it, was proposed to mark the 10th anniversary of two sister cities, Hamburg and Chicago." The five designs were presented on March 1, 2006, though it's not clear if one has been selected yet or when one will be selected as the winning design.


The Chicago Square site

It's hard to say anything about the designs, as only small model images are available at the moment. It appears that each scheme uses one or two towers as focal points for the project -- most notably in Jeanne Gang's and Helmut Jahn's designs -- combined with low- and middle-rise buildings arranged on the rest of the site.

Here's the five designs (slide show link):


Dirk Lohan (Lohan Anderson)



Jeanne Gang (Studio/Gang Architects)


Helmut Jahn (Murphy/Jahn)


Mark Sexton (Krueck & Sexton Architects)


John Ronan (John Ronan Architect)

(Thanks to Antonio C. for the head's up!)

Bara Pacis

Newsweek reports on Richard Meier's Ara Pacis Museum becoming "a lightning rod for protest against war and America." Notable as "the first modern building project in the historical center since the...1930s," it has drawn criticism, been beset by delays periodically ever since it broke ground, and is only half-finished. Nevertheless, "Visitors have taken to expressing their dissatisfaction in graffiti."



The above image, taken from the Newsweek piece, appears to be a rendering of the complete project, probably incorporated into the construction fence and a welcoming surface for graffiti. I'm guessing security makes defacing the actual building impossible.

While Newsweek makes a point of mentioning anti-war and anti-American protests, the article is more about the non-contextual design of Meier's -- its alien white presence in the travertine, Baroque surroundings -- than these larger issues. Not surprisingly, since not only is it the first building in Rome's city center in 75 or so years, it also houses one of the most important pieces in Roman history, Emperor Augustus's Altar of Peace.

Meier deflects criticism of the design with the oft-repeated and now tired mantra of "life in Rome moving on into the 21st century." (See also Frank "we're not riding around on horseback anymore" Gehry's retorts to criticisms of his Atlantic Yards project) Surprisingly, Meier's website puts a different spin on things (my emphasis):

The location of the site has particular characteristics due to its outstanding historical, archeological and architectural values, and requires a process of enhancement and a level of quality that will ensure the approval from the Italian and the international architectural communities, as well as from the general public.

Ensuring this approval was former Mayor Francesco Rutelli, who picked Meier and pushed the design through the appropriate channels. His successor does not share Rutelli's seemingly blind allegiance to Meier and his design. Instead now Mayor Walter Veltroni is more aligned with Italian art historian Vittorio Sgarbi who burnt a model of project at its opening in April and who says Meier, "[knows] Rome the way I know Tibet."

(via Veritas & Venustas)

Billmon Gets It - Do You

Buried deep in a Billmon Post last week was a critical chart and a few words of wisdom on why this is NOT a repeat of the inflation scene of the 70's and 80's. Most reading his post probably missed the key idea in a potpourri of other ideas. Let's take a look.

Wages and Salaries

We would need to see a lot faster wage growth -- growth at or exceeding the current 3% core CPI rate -- before I would think about buying a piece of the inflation is coming back story.


















And while those kind of wage gains are not impossible I definitely don't see it right now. What we have, in other words, is almost pure cost-push inflation -- instead of the wage-price spiral that made the '70s such an interesting time to live through, financially speaking.

At some point, presumably when the extra disposable income derived from that last mortgage refi runs out, households are going to have to suck it in. Indeed it looks like it's already started -- retail sales are weakening and the Amazon-sized river of imports flowing in from points east (or west, if you live in California) has actually slowed a bit.

Meanwhile, job growth has decelerated, jobless claims are creeping up and housing starts finally appear to be, well, stopping.

That indeed is the heart of the matter. I have been harping about this for what seems like ages. Everyone is in some sort of "Inflation Scare" AFTER 16 consecutive rate hikes. Does this make any sense? I suppose it does to those that are perpetually gloomy on the US$ or US treasuries who probably now feel vindicated by this blip up in treasury yields.

It all comes down to wages and housing and jobs. Without meaningful rises in employment and wages, the former above the birth rate plus the rate of immigration (both illegal and illegal), and the latter above the TRUE cost of living, inflation really does not have a chance. Yes at 1% we had sustainable inflation. An incredible housing boom was the result. The better question (looking ahead) is "What Now?"

Has Inflation Won Out?

I have been asked countless times what it would take for me to throw in my "deflation towel", oddly enough(or perhaps not) most of those questions have come in the last few months right on the verge of victory. Unlike Stephen Roach (a Morgan Stanley permabear who suddenly and without reason turned bullish about two weeks ago), I am not reversing course here.

Is that illogical? I think not. I have many times stated what will change my mind. It is really simple: "wage increases, job growth, and housing that does not bust". I see little reason to change course now. In fact, treasuries are probably a screaming buy.

Primer on Inflation

Most people screaming "inflation" do not know what it really is.
Those that think "Inflation = Price Increases" are sadly mistaken.
In fact that is one of the reasons why we see repetitive bubbles being blown by the Fed.

If you think inflation = price rises, I suggest reading the following:

1. Inflation: What the heck is it?
2. Inflation Monster Captured
3. Marc Faber shatters prevailing market myths

One of the reasons for these repetitive bubbles is the Fed does not itself know what inflation is. They think they can micromanage the economy when all they are doing is chasing their tale due to the lagging effect of their actions.

At some point, and I think we are at that point right now, a sort of economic zugzwang is reached. I spoke about this in Red Queen Race. Here is the critical diagram.



In economic terms, there is no magic mirror.
Bernanke is trapped in "Wonderland" but unlike Alice has no way out.
Bernanke gets to choose between hyperinflation and deflation.
The moment he can not run fast enough, the US economy will implode.
If he runs too fast, the value of the US dollar as well as the Fed�s power will both come to a very abrupt stop.

Economic Checkmate

In effect Bernanke is in Zugzwang and he does not even know it.

Eventually Bernanke (like the Bank of Japan) will have to choose deflation. The reason is simple: hyperinflation will end the game, which in turn would eliminate the wealth of the Fed as well as all of their power.

I do not know if Billmon is an inflationist or a deflationist or either. Personally I think the latter (neither). What I do know is that without wage growth and with a housing bust, inflation is extremely unlikely to raise its head.

While everyone else is looking at the oil scare in the 70's as the model, virtually no one is looking at Japan of the 90's as the model. I am betting on the latter.

PS to Billmon:
Whatever graphic package you are using it seems worse than google software that I am using that only handles JPEG images as opposed to GIF images. I touched up the years on your chart as well as adding a trendline to show just how pathetic this recovery has been wage wise. But... beggars can't be choosy. Nice article.

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

Blackhawk Down

Who woulda thunk the developer capable of this:



is also capable of this:



Well, Structured Development is extending its role in the North and Clybourn retail district (what I like to call Chicago's "outdoor mega-mall") with this even larger mixed-use project, designed by Valerio Dewalt Train Associates. Refreshingly, in addition to the expected retail and parking uses is a school component, probably responding to the changing character of residents in the area as the Cabrini-Green housing projects fall by the wayside.



The first phase of the project is slated for completion in about a year and a half. To see bigger images of what's above, check out the project PDF. Thanks to BK for the head's up!

Monday, Monday

My weekly page update:

FLaTPak House by Charlie Lazor.

Some unrelated links for your enjoyment:

Danda
A well done online architecture journal with reviews, galleries and links. (added to sidebar under online journals)

Architecture 2006
This weekend's special section of The New York Times with articles on Bernard Khoury, Richard Rogers, building in China, and much more.

Rebuilding Place in the Urban Space
A blog that "focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging." (added to sidebar under blogs::urban)

Weekly Aerials

I apologize for the three-day drought in posts on this page, though I assure you it was for good reason. After months of procrastinating, I finally got around to creating Google Earth links for (a lot of) my weekly doses.

For your globe-surfing pleasure, I've created one .kmz file with locations for (as of today) 142 of the buildings featured on my weekly page. The link to this file will be located in this page's right sidebar (under My Links) and will be updated as new pages are added; the date of the last update will be indicated. For each location in Google Earth, a thumbnail image and link to the dose are included.

Here's an example of what you'll see:



The next step will be to incorporate individual Google Earth links into each featured weekly page, as well as appropriate Archi-Tourist pages. If you can help with any of the missing buildings, please don't hesitate to let me know.

Ostrich of Omaha

Michael Mandel, chief economist for BusinessWeek, is writing about the 'Ostrich of Omaha'.

Buffett's bearishness on the U.S. economy ignores how Americans' hard work adds value at a steadily higher rate than trade adds debt. To be frank, I'm getting a bit tired of Warren Buffett's pessimism about the U.S. economy.

The so-called Oracle of Omaha, the second-richest man in the world, was anti-New Economy in the 1990s. Now he's downbeat on the U.S. dollar.

In his latest letter to the shareholders of Berkshire Hathaway, Buffett wrote: "The underlying factors affecting the U.S. current-account deficit continue to worsen, and no letup is in sight.... Either Americans address the problem soon in a way we select, or at some point the problem will likely address us in an unpleasant way of its own."

We don't need this "voice of prudence" from someone worth more than $40 billion.

Mandel writes "We don't need this voice of prudence from someone worth more than $40 billion." Somehow that does not seem exactly right. Here, let's try this version: What we don't need is someone who is totally clueless about factors affecting the current account deficit giving Buffett a lecture about "fundamental market values" based on the nebulous idea of "hard work".
Mandel continues with:

"Lucky for us, the Social Security Administration publishes a range of long-term forecasts going out to 2080, which take into account a variety of assumptions about demographics and productivity. Their most pessimistic forecast calls for a long-term growth rate of 1%, while their optimistic forecast projects that long-term growth will average 2.8%.

The fundamental market value of the U.S. economy also includes the output generated by future labor -- that is, all the skilled labor and hard work that Americans will put out in the years to come.

It turns out that the market value of the U.S. economy is increasing by anywhere between $4 trillion to $7 trillion per year. To put it in financial terms, this is the annual capital gains for the whole American enterprise. By comparison, our trade deficit means that the U.S. is adding roughly $1 trillion in external debt each year. That's a big number, but far less than the increase in the market value of the economy. From this perspective, we can keep this up forever."

USA! USA!
Other industrialized countries are not so fortunate. It's expected that the prime-age working populations of Japan, Germany, and France will start shrinking soon. As a result, most current forecasts call for these countries to have very slow economic growth 20 years from now. That means the fundamental market values of these countries is rising very slowly, if at all.

My advice to Buffett is to apply the same sort of fundamental analysis to countries as he does to the stocks he owns. He might find that it's the U.S. that is the better deal.

Lucky For Us

Gee, "lucky for us" the Social Security Administration publishes a range of long-term forecasts. That is indeed lucky, or do I mean useless? Since when has any long term government forecast been any good? I also have to wonder if Mandel thinks Buffett is supposed to feel "lucky" that Mandel is so generous with his advice.

"It turns out that the market value of the U.S. economy is increasing by anywhere between $4 trillion to $7 trillion per year."

This is a lot like looking at the stock market in 2000 and projecting future earnings growth as far as one can see forever into the future without considering whether or not the result is sustainable.

Other than "hard work" Mandel does not explain where this "market value" comes from. He does not look at production of goods or manufacturing and perhaps presumes we can keep borrowing forever while flipping each other houses at ever increasing prices, living happily ever after. One can work hard at digging holes then filling them up again but that work simply is not productive. Working hard at flipping homes or working hard at passing the trash (risky loans) to Fannie Mae is not exactly productive either, and certainly bombing Iraq to smithereens is not what anyone should call productive.

Just as people were offering Buffett advice on "The New Economy" in 2000 we now have economists like Mandel explaining to Buffet how the US can "can keep this up forever".

To any thinking person that is just another version of "It's Different This Time". I have no doubt this proclamation from Mandel will prove to be as foresightful as the June 2005 cover of Time Magazine "Why we're going gaga over real estate" or the 1999 Economist cover story predicting $5 Oil with a cover touting "awash in oil".

The Richeb�cher Letter

Actually the best rebuttal to Mandel's "It's Different This Time" argument come from the May issue of the Richeb�cher Letter. Let's take a look at a few highlights. Richeb�cher writes:

It Is Far Worse Than In 2000

THE NEW U.S. ECONOMY

The policy dilemma currently facing the United States can be simply stated. Economic growth has become completely dependent on consumer spending, and this, in turn, has become completely dependent on rising house prices providing the collateral for the most profligate consumer borrowing.

This borrowing has become a necessity because income growth has abruptly caved in. Rock-bottom short-term interest rates and utter monetary looseness were the key conditions fostering altogether four bubbles: bonds, house prices, residential building and mortgage refinancing.

What developed is an economic recovery with an unprecedented array of escalating imbalances: ever-declining personal savings; an ever-widening current deficit; exploding government and consumer debts; and, on the other hand, a protracted shortfall in business fixed investment, employment and available incomes.
We must admit that the staying power of this extremely ill-structured and debt-laden recovery and the stubborn buoyancy of the financial markets have rather surprised us.

But this only lengthens the rope with which to hang oneself. What American policymakers and most economists studiously keep overlooking is that the credit bubbles are doing tremendous structural damage to their economy. The longer the bubbles last, the greater the damage.

DEBT EXPLOSION VS. INCOME IMPLOSION

This time, we want to focus on the dramatic shortfall of employment and income growth that radically distinguishes this recovery from all its precedents in the postwar period. It must have a particular cause, but where is it? In search of its causes, we contrast, first of all, credit and debt growth with income growth.

Over the five years from 2000�2005, total debt, nonfinancial and financial, has increased $12.7 trillion in the United States. This compares with a simultaneous rise in national income by $2.1 trillion. For each dollar added to income, there were $6 added to indebtedness.

In real terms, national income increased little more than $1 trillion. Last year, U.S. private households added $374.4 billion to their disposable income and $1,204.7 billion to their outstanding debts. Inflation-adjusted disposable income grew $115.7 billion. It is a growth pattern with exploding debts and imploding income growth.

To make our point perfectly clear: The present U.S. economic recovery has never gained the traction that it needs for self-sustaining economic growth with commensurate employment and income growth. As to its main cause, all considerations lead to the conclusion that it must reside in the protracted, appalling shortfall in business fixed investment. Investment spending is, really, the essence of economic growth.

Our own considerations begin with the recognition that the U.S. economy is, in every single respect, in far worse shape today than it was in 2000, and also that there is no other bubble in sight to replace the housing bubble. Everything depends on the housing bubble to rapidly reflate once the Fed eases again.

Our strongly held assumption that the U.S. economy is in a most precarious condition basically has two reasons. One is the extravagant size of the housing bubble, involving the whole financial system to an unprecedented extent. The other is the grossly ill-structured economy, replete with imbalances inhibiting sustained economic growth.

CONCLUSIONS:

Forecasts for the world economy are generally optimistic in the expectation that the U.S. economy will continue its global pull with continuous strong growth. We think the anemic and extremely unbalanced U.S. economic recovery is in its last gasp.

Our key consideration is that the U.S. economy has become perilously addicted to asset inflation in general and the housing bubble in particular. Both rising asset prices and the rising dollar had their foundation in carry trade of astronomic scale. While interest rates may still appear rather low compared with the inflation rates, the Fed�s rate hikes have pulled the rug from under the dollar-based carry trade.

Mandel practically taunts Buffett without considering the effects of globalization and what that that has done to real wages, he ignores a credit bubble, a housing bubble and instead focuses on a cyclical recovery of stocks while making huge assumptions about "hard work".

Somehow the busting of the housing bubble is of little importance to Mandel. Then again, perhaps he does not see that trainwreck coming. Nor does Mandel look at earnings, book values or dividends.

In The Big Chair John P. Hussman of Hussman Funds addresses some of those issues.

It's interesting that the current P/E is about double its �normal� level based on the current position of earnings. If you look at the price/book ratio on the S&P 500, at 3.1, it's also about double the historical norm of about 1.5. The price/dividend ratio on the S&P 500, at 54, is about double the historical norm of about 26. The price/revenue ratio on the S&P 500, at 1.5, is nearly double the historical norm of 0.8. This market isn't cheap.

From an economic perspective, corporate profits as a share of GDP are near an all-time high. Historically, a high profit share relative to GDP has generally been followed by disappointing earnings growth over the following 5-year period.

What's worse, nearly all the growth in U.S. domestic investment since the mid-1990's has been financed by imported capital � which we observe as a current account deficit � so that the observed �productivity boom� has gone hand in hand with an expansion in imports. To the extent that we now have an intolerably deep current account deficit, the U.S. is likely to observe restricted growth in capital investment in the coming years, which will tend to be a drag on productivity even while real wages increase. The resulting squeeze on profit margins may be acute within a few years.

In short, the S&P 500 is richly valued on the basis of nearly every fundamental measure, including earnings when those figures are properly considered. The point is not to predict a near-term decline in stocks, but rather to emphasize that the long-term returns priced into stocks here are likely to be disappointing.

So what did Buffett miss if anything? Perhaps he missed predicting that the Fed would panic by slashing interest rates to 1%, or perhaps he did not foresee panic home buying where 40% of the homes bought over the last two years were for "investment purposes" or perhaps he failed to account for the effects of credit standards lowered to the point that if one could breathe one could get a mortgage.

Please consider the MarketWatch bulletin Banks' mortgage demand weakens. Published quarterly, the Fed's senior loan officer survey polls 57 domestic banks and 19 foreign banks about lending trends. Of the respondents, 11.3% said they'd eased home mortgage lending standards, while only 1.9% said they'd tightened them somewhat.

The interesting thing is that even in the face of rising foreclosures and rising bankruptcies companies are still lowering credit standards. The fact that companies are acting reckless by taking on more and more risk in the face of deteriorating fundamentals is something that anyone but an ostrich should clearly be able to see.

More than likely Buffett did not miss much if any of that and chose to be relatively bearish on a market driven by such forces.

The question now is who would you rather believe?

1. John Hussman, Warren Buffett, Dr. Kurt Richeb�cher
2. Michael Mandel

Will the "Real Ostrich" please come up for some fresh air?
Having your head in the sand clearly affects one's thinking.

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

Burn Rates

John Doe on the Southern California Real Estate Bubble Crash Blog made an interesting post about Burn Rates.

Over the past few days, we've had the chance to review the proverbial Canary in the Coalmine, San Diego. It doesn't look good. Inventory has been continuing its parabolic rise. It surpassed its all-time record set in July 1995 of 19,250 some time late last month. The population adjusted inventory record will likely be surpassed within 1 month, give or take a few weeks.

Median prices have been flat for at least a year, with considerable weakness shown in recent months that show down since summer last year. Housing analysts agree that houses are not like stocks, and prices will not go down because they have intrinsic value that is not like a piece of paper like stocks.

True, houses are not like stocks in every way, but a market is still a market, and certain attributes of a house ARE different than a stock.

One of the biggest differences between the typical house purchase and the typical stock purchase is that most homes have substantial holding costs while stocks often have little or none (not opportunity cost, just the cost to keep someone from taking it away from you). This is your burn rate. With flat or shrinking equity, time to sell means over time, you lose money, even if you are just standing still.

OK, so let's look at some hard data:

1. According to Bubble Tracking, Current inventory stands at just over 20K and last months' sales were 2600. That puts us at roughly 7 3/4 months inventory, a decidedly bad place for the local area to be in.
2. In recent months, the average payment homeowners committed to was just over $2700/month. If you take the premise that the average home is going to take nearly 8 months to sell, the selling opportunity (new holding costs) for the current strike price could be as much as 7.75*2700=or about $20K If inventory goes higher to 10 months, it would be $27K. Keep in mind the average new payment includes equity rolled in, so we don't really get a lift from current equity.
3. Interest rates are most likely on the rise. We demonstrated that the average spread between Fed Funds Rates and 30 Year rates were about 3%, current rates are about 2.5% too low (payments should be about 50% higher than they currently are). With net out-migration, don't expect expanding rents or newcomers to handle the coming inventory.

The burn rate for many San Diegans should start to get difficult to handle in the near future.

I asked Mike Morgan of MorganFlorida his take on Burn Rates. At least San Diego is holding up better than Florida (for now). Not only does Florida have high carry costs, home prices are collapsing on top of it all. The insurance situation with hurricanes and sinkholes is not exactly helping either.

Here was Mike's response:

I just completed a two day tour of Gulf Coast and East Coast Florida developments, visiting developments in Naples, Marco Island, Bonita Springs, Miami, Palm Beach and the Treasure Coast. After speaking with several sales agents for builders, it was clear they were all willing to make deals to make sales. This is unheard of. Historically, the listed price is the price. No more. Now, you can just about name your price and name you incentives from free upgrades to price reductions, a car, vacation timeshare, etc.

The most disturbing thing I heard was from the resale market. In the same developments where builders are trying to sell, the resale market is huge. We saw 20-50% numbers of the total number of homes in developments that are on the resale market listed in the local MLS systems. The builders agents are NOT selling homes. How can they, when the flippers are willing to undercut any price the builders can drop to. To analogize this, think about going to a new car dealer to buy a new car, but right next door is a lot filled with the same brand new cars for 10-20% less. Same car, same warranty and a wider selection, but 10-20% less. There is no reason to buy the car from the dealer. And there is no reason to buy these homes from the builder, when you can buy the same home for less from a flipper that is desperate to cut his losses.

We were the only traffic at any of the builders we visited. They had no other buyers and they all told me the same thing. Sales are dead, and they will do whatever it takes to make the sale. But we heard the same thing from the agents for the flippers. I�ll stake my reputation that we start seeing negative sales numbers in Q3 or Q4. It is inevitable. Moreover, with lower prices and higher selling expenses, margins will be squeezed to low single digits . . . if they are lucky.

Think about this. In the high-rise market with a 1.5M condo, the carrying costs for Condo Association Dues, maintenance, insurance and taxes are about $4,000 a month. And that is without a mortgage. Add an 80% mortgage and your carrying costs jump to more than $10,000 a month. For a $500,000 home the number is more than $3,000 a month. The builders have been telling the Street that the high end market has no investors. I found more flip inventory in the high end than the low end!

The carrying costs apply to flippers as well as builders. As the builders complete inventory and get a Certificate of Occupancy, they must start paying Insurance, Mortgages, Association Dues and taxes based on the appraised value of the units. That, combined with lower margins and a halt in sales will crush the builders� bottom lines.

The market is in far worse shape than I had anticipated. If some of the Wall Street Analysts got out of their offices and into the field, they�d be singing a different tune. And with another Fed increase inevitable after yesterday�s CPI, it is clear the builders are in more trouble than they have ever been in. It is different this time.

It�s a lot worse than I thought. And I have been accused of being too negative!
I will put more together next week.

Mike

Perhaps this explains why would be flippers are walking away from $80,000 deposits.
By the way, those are the lucky ones. Condo buyers that closed are trapped in a situation with no buyers and no renters. The foreclosure party has just started.

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

Remodeling Bubble

The Pacifica Tribune is reporting the remodeling bubble still going strong.

Talk to a home buyer, home seller or real estate pro these days and you'll get a brisk debate about whether there's a real estate bubble in our area � and whether it's going to pop. But there's no debate on about the remodeling bubble � it's still fully inflated, and that could be very good news for the value of your home.

What remodeling bubble, you ask? Well, every year the Cost vs. Value Report by Remodeling Magazine lays out statistics on the investment return of kitchen and bathroom remodels, room additions and other projects in every major city in America. Last year, the San Francisco numbers were stunning � 150 percent returns on many bathroom, kitchen and deck projects. In other words, every $10,000 you laid out for a project like that would enhance the value of your home by $15,000.

Don t want to put 32K into your bathroom? A mid-range bathroom remodel costs an average of $13,700 in the Bay Area and increases your home value by over 23K. That's a 169 percent return.

The same project in Salt Lake City returns about 80 percent.

If you remodel your kitchen, you'll be cooking up some serious equity as well. The survey says low-end ($17K) and mid-range ($52K) kitchen projects around here return 153 percent and 147 percent, respectively. An upscale kitchen remodel, in the neighborhood of $100,000, returns about 118 percent, compared with the national average of 85 percent.

And again this year, you can generate the same equity benefits with much smaller projects, even regular maintenance. Does your roof need replacing? The report says that on average you ll spend almost $16,000, which is a pain in the wallet � until you find out the new roof will enhance your home value by more than $18,000. Spend $9600 on new siding and your home value increases $10,700. Replacing your windows or adding a small deck are both projects that cost in the low five figures and boast return rates of 130 and 160 percent, respectively.

Bruce Turner is president of TurnerBuilt, Inc. He can be reached at bturner@turnerbuilt.com

Well I am glad Bruce Turner agrees this is a bubble.
It is probably the only thing he got right.
Over the long haul one simply can not destroy a $10,000 kitchen, replace it with a $40,000 kitchen and expect to make money on it by selling it for $60,000. Yet that is what Bruce Turner is expecting. Now if you are putting in a $40,000 kitchen by yourself with materials that cost $10,000 that might be another matter (in regards to expected profitability). But that is hardly the norm.

The extreme example of this sort of nonsense is teardowns. People are bulldozing $400,000 homes and putting up $1.5 million dollar homes expecting to get that $400,000 back and them some. I have news for Bruce Turner: They won't. Nor will someone destroying a $10,000 kitchen in favor of a $40,000 kitchen. The times have changed.

On that note the Mish Telepathic Question Lines are now open.
The predominate question seems to be: "Mish do you have any proof of that?"

Well, actually I think it is obvious, especially when it comes to structural damages like roofs and concrete problems, but let's take a look at my favorite renovation index: Home Depot.

The AP is reporting Home Depot 1Q Profit Up Despite Weak Sales.

Weak demand for flooring and seasonal products were partly to blame for The Home Depot Inc.'s disappointing retail sales in the first quarter, though it still reported a 19 percent jump in profit and reaffirmed its growth guidance for the year Tuesday.

Shares of its stock, which has lagged behind rival Lowe's Cos. of Mooresville, N.C., fell more than 5 percent on the news.

"Our stock price is a conundrum, but rather than spending a lot of time stewing about that, we focus on growing the business," Chief Financial Officer Carol Tome said in an interview.

The company acquired Hughes Supply -- a distributor of construction, repair and maintenance products -- in the first quarter, and that company's results are included in Home Depot's consolidated results for the final month of the quarter.

Hughes Supply has more than 500 locations in 40 states.

In part because of the acquisition, Home Depot said its Home Depot Supply division saw its sales jump to $2.13 billion in the first quarter, compared with $657 million in the year-ago period. It saw the segment's operating profit jump to $149 million in the quarter, compared with $28 million in the same period a year ago.

For comparability purposes, The Home Depot said it will no longer report sales at stores open at least a year, a key retail barometer also known as same-store sales, but will now report total sales growth for both of its segments as a percentage change over the prior period.

Following is a chart of Home Depot.
Click on the chart for an enhanced view.



"Our stock price is a conundrum" said Chief Financial Officer Carol Tome. A conundrum? Really? Your only means of growth is by acquisition, and you have stopped reporting same store sales. What is it that you are afraid of on those same store sales? Falling sales perhaps?

That is the answer to the conundrum and that is why Bruce Turner is both 100% wrong and 100% right. He is 100% right about remodeling being a bubble. He is 100% wrong about expected remodeling returns from here on out.

Here is the not so pretty current picture if anyone wants it. It might be necessary to do $40,000 worth of fix-ups to sell your house for $20,000 less just to get rid of it. That is how fast home inventories are now rising.

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

Snap! Crackle! Pop!

When Kellogg's Rice Krispies are toasted the cooked and dried rice "berries" expand their size (puff) to many times their normal size.

Since the weight of the rice berry and its material mass remains nearly the same, the rice material is stretched to form very thin walls of the Rice Krispies structure.

This is much like a very thin glass crystal. When subjected to a change in heat, a severe "stress" is set up and the thin wall fractures - creating a Snap, Crackle and Pop!

This happens in the cereal bowl when cold milk (i.e. heat stress) is poured in the Rice Krispies and presto SNAP! CRACKLE! POP! The sounds are made by the uneven absorption of milk by the cereal bubbles.

It seems the market as of late is much like a bowl of Rice Krispies.

When subjected to a change in sentiment, severe "stress" situation are set up. Distinct SNAP! CRACKLE! POP! sounds are made by the uneven absorption of decreasing liquidity in various market bubbles. Let's take a look at a few examples.

Snap!

A loud Snap! was heard when the $NDX broke both the trendline and the 200 day moving average.



The Homebuilder index snapped its trendline on a weekly basis and as you can easily see has plenty of room to fall.



Investors (using the word loosely) have been pouring into various emerging market ETFs without paying any attention to how technically stretched those charts were. TRF, the Templeton Russia ETF is one such example. In spite of a 20% snapback in a mere three days, the fund is still 21% above NAV. There are many such examples of technical damage done to charts over the last couple weeks or so, some just since last Wednesday. Is this another chance to buy or is it the start of something more significant? That of course is million dollar question.



Crackle!

The crackling sounds you are hearing can be depicted by rising foreclosures as well as the National Association of Homebuilders Housing Index. It dropped below 50% for the first time since 911. Two of the last three times it plunged like this a recession followed. There was a plunge but no recession in 1995.



MarketWatch is reporting Builders' confidence falls to 11-year low.

Contractors have negative outlook on market for first time since late 2001

The NAHB/Wells Fargo housing market index, a builders' sentiment gauge, fell six points in May from a revised 51 to 45, the lowest level since June 1995, the industry group said. The index shows more builders say the market is "poor" than say it's "good."

Despite the sharp decline, builders are still more optimistic about sales over the next six months than they are of current sales.

In May, builders' assessment of current single-family home sales fell to 50 from 55. The assessment of future sales dropped to 54 from 59. The assessment of traffic of prospective buyers dropped to 32 from 39. All three subindexes were at their lowest levels since mid-1995.

Expectations for sales in the next six months decreased during in May by five points to 54, the NAHB said. The traffic of prospective buyers fell the most sharply, dropping seven points to 32.

Traffic down, future expectations up. Sounds like denial to me.

The Atlanta Journal is reporting Home foreclosures soar, with Georgia leading the way.

Georgia leads the country in the rate of foreclosure, RealtyTrac said. The number of Georgia homes in some stage of foreclosure has more than doubled since the end of 2005. Currently, there is one foreclosure for every 127 households � almost 25,000 homes statewide � RealtyTrac reported.

Rick Sharga, vice president of marketing for RealtyTrac, said recent mergers and layoffs in some of metro Atlanta's largest employers help explain the sharp rise in foreclosures. Unemployment and foreclosure rates are closely linked, Sharga said.

"That could be a factor in a place like Georgia where you've had a lot of churn," Sharga said.

The Consumer Credit Counseling Service of metro Atlanta, which works with foreclosed homeowners like Steedley, reported a 20 percent increase in first-quarter 2006 referrals for housing finance problems compared with the first quarter of 2005.

CCCS President Suzanne Boas said Georgia's short foreclosure process, which bypasses the court system, contributes to the state's high rate because it attracts aggressive lenders willing to make loans to marginal candidates. Once a property enters foreclosure, it can be sold at public auction within 37 days.

"Our state is very attractive to lenders, and part of that is our non-judicial foreclosure process," Boas said. "There have been a number of incredibly aggressive products [loans] marketed to consumers over the past five to eight years. Now we're starting to see the fallout of that aggressive marketing."

The Coloradoan is reporting a sharp increase in foreclosures.

Colorado saw the second highest foreclosure ratios in the first three months of the year, a time in which nationally, foreclosures increased 38 percent over the previous quarter.

"The sharp increase in foreclosures in the first quarter continues a steady upward trend that we've seen since the beginning of the year last year," said James Saccacio, CEO of RealtyTrac.

Over-zealous homebuilding is adding supply at a rate too quick for the current market to absorb. More than one-fifth of the Larimer County households that entered foreclosure in March was a brand new home.

The supply of homes for sale on the market is another factor. Fifty percent of the homes on the market in the region are vacant, including about 20 percent which are brand new homes.

More than 13,000 Colorado households entered foreclosure proceedings during the first quarter this year, at the second-worst rate in the nation after Georgia.

WTVM is reporting forclosures in Columbus are rising

Experts say foreclosures in Columbus are up 25 percent from last year. The culprit -- rising mortgage rates. Something a lot of homeowners didn't budget for.

"I don't think people really read the fine print about what was going to happen to their payment when the interest rates went up,"says Daniels.

The Crackle! sound you hear is that of people buckling under the weight of a mortgage they never really could afford in the first place.

Greedy lenders made it easy for people to buy houses but difficult for people to hang on to them. This sound is only going to get louder as it spreads to states where housing prices still have not yet taken a significant tumble.

Pop!

The Pop!Pop!Pop! sound you hear is from bubble areas like Florida where speculators want out so bad they are willing to walk away from $80,000 deposits.

The National Post (Canada) is asking Housing boom a bust?

South Florida was once so hot speculators flocked to buy and flip properties. Now the market has cooled so much they're walking away from US$80,000 deposits

"This is the first cycle that you could actually instantaneously crystallize the rise in the notional price of a home and use it for current consumption," says David Rosenberg, chief North American economist for Merrill Lynch & Co.

"The mortgage market today is bigger than the government bond market; housing is valued at double the level of household equities on the household balance sheet," he says. "Never before has housing come to permeate the economic and social fabric to the extent that it does today. So that's why, if you ask me, what the No. 1 risk is to the U.S. economy: It is going to be what the house-price landscape is, what happens to house prices."

In Miami-Dade County alone, there are 25,000 condos under construction and another 25,000 that have already got their financing and are likely to go forward, says Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield, Fla. In addition, 50,000 more have been announced.

In the whole period from 1995 to 2004, only 9,079 units were built in Miami Dade.

The Merrill Lynch study found non-traditional mortgage products accounted for 60% of loans last year in California, the hottest market in the United States.

"That's really bizarre," says Mr. Shaffer at Prestige Mortgage. "When you think about it, you should be fixing at historically low rates."

Many flippers are now walking away from their deposits or trying to wiggle out of their contracts, using shoddy workmanship as a loophole. Mr. Morgan says he now has 43 investors who are walking away from deposits of US$35,000 to US$80,000.

"Never before has housing come to permeate the economic and social fabric to the extent that it does today. So that's why, if you ask me, what the No. 1 risk is to the U.S. economy: It is going to be what the house-price landscape is, what happens to house prices."

In Miami-Dade McCabe is reporting a potential 100,000 more condos coming online with 25,000 of them already started. No matter how you look at it, that is a bubble and it is popping now. The size of the mortgage bubble is both enormous and obvious. Well at least it should be obvious by the sounds being made.

Denial or Deaf?

Please consider Bottom's up? Maybe.

Some estimates predict a fifth of the nation�s 77 million baby boomers will buy homes in Florida in the next decade.

�Southwest Florida is still a very solid market,� said Timmerman, based in Naples. �We�ve got a lot of people with money who still like it here.�

That�s not much consolation to impatient sellers like Kasey Reavis, who now finds herself competing with thousands of other sellers in a flooded market that�s seen sales slow to a crawl.

A single mom who works for a property management company, Reavis hopes to use the money she makes off her Golden Gate house to move to a more affordable area in Georgia. She�s got her eye on a town with a good school district.

�I�m lucky if I have $30 left at the end of the week,� Reavis said.

But leaving requires a buyer.

Her three-bedroom, two-bath house with a new roof and new tile on a corner lot is listed for $299,900 � a price that was hard to find in last year�s market that saw agents fielding multiple offers for properties as soon as they hit the market. Reavis paid $150,000 in 2003.

After almost a month on the market, Reavis� agent hadn�t shown it to a single potential buyer.

It�s a lament from agents all over town these days: Where are the buyers? It�s a buyers� market, but many buyers still don�t know it.

�A lot of people have some very inflated numbers,� said Rob Dowling, a Naples agent with the John R. Wood real estate firm. �They�re saying �Gosh, if I can get all that money, I will move.��

"It's a buyer's market but buyer's don't know it yet." Yeah right. It makes as much sense to say it's a sellers market but sellers don't know how to price their units to sell. Rising inventories and falling sales both show that the housing bubble has a lot more popping to do.

Mish addendum: This was written two days ago and first used today by WhiskeyAndGunpowder. The index charts above will reflect that, and now look worse, a louder "Snap!" if you would.

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