The US Dollar - A Few Comments

On December 17, I commented on the US Dollar, especially in the context of the US Dollar carry trade.

Today, I would like to make a few overall comments about the US Dollar. Here is a weekly chart of the US Dollar from 2000, with the MACD and CCI indicators shown above the price plot:



Chart courtesy of Stockcharts.com

I have also included a few trendlines shown in blue and red. As one can see, at the present price of 77.02, the USD is near the bottom of the price range of the last 10 years.

Many people, especially those of the "hard money" and "Austrian" philosophies, have long held that many of the actions we (as a nation) have been taking to combat our current period of economic weakness would unduly pressure the dollar. These actions have included very low interest rates, truly outsized interventions (including "money printing") and deficit spending.

So far, as can be seen on the chart, the US Dollar has "held in there", most likely for a variety of reasons.

It should be very interesting to watch the US Dollar from here. Although there appears to be few, if any, signs that a severe US Dollar decline is impending, as stated above many of the actions we have been taking (and will most likely continue to take) are certainly cause for concern when viewed in context of US Dollar strength.

The strength of the US Dollar is of paramount importance, because (of course) perhaps the fastest and most assured way of getting into severe economic trouble is to have rapid currency depreciation.


SPX at 1136.22 as this post is written

Three Unemployment Charts

Occasionally, I have posted charts concerning unemployment. With Friday's unemployment release, here are three charts that I find noteworthy:

First, from the St. Louis Fed site, the Median Duration of Unemployment.



Second, from the CalculatedRisk blog of 1/8/10, Unemployed Over 26 Weeks:



Third, again from the CalculatedRisk blog of 1/8/10 - I like this chart as it presents a relative depiction of Post WWII recession job losses. As one can see, our current period of economic weakness’s job losses are outsized both in duration and severity:



As depicted by these charts, our unemployment problem is severe. Unfortunately, there does not appear to be any "easy" solutions.

A few months ago I wrote a series of blog posts titled "Why Aren't Companies Hiring?"


SPX at 1141.18 as this post is written

Updates On Economic Indicators

Here are some indicators that are supposed to predict and/or depict economic activity. These indicators have been discussed in previous blog posts:

The ECRI WLI (Weekly Leading Index) was at 131.5 for the week ended January 1. From the story in the link below: "'With the WLI climbing to a one-and-a-half-year high, the U.S. economy is firmly set to strengthen in the coming months,' said Lakshman Achuthan, Managing Director at ECRI."

http://www.businesscycle.com/news/press/1685/

Fortune's Big Picture Index was at 17.59 as of December 18. This is at a level that is very near to the low of the data series; furthermore, as one can see, its gauge depicting "recession v. recovery" seems to strongly indicate "recession."

http://money.cnn.com/magazines/fortune/storysupplement/recovery_index/index.html

The Dow Jones ESI (Economic Sentiment Indicator) is shown to be at 38.7 as of December 31, having risen steadily throughout 2009.

Here is the latest chart depicting the Aruoba-Diebold-Scotti Business Conditions (ADS) Index. I wrote a blog post concerning this index on October 27:



http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/

Lastly, although I have not discussed the Conference Board LEI (Leading Economic Indicator), I find the chart included in this press release to be interesting. Here one can see the LEI at 104.9 for November. As seen in the December 17 Press Release (link found below), the LEI is now slightly higher than the latest peak of July 2007.

The CEI (Coincident Economic Index) is at 100.1. There is a sizable difference between the LEI and the CEI.

http://www.conference-board.org/pdf_free/economics/bci/USLEIpr_1209.pdf

SPX at 1144.98 as this post is written

Characteristics Of The Housing Bubble

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals. It shows the equity and mortgage debt situation. The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/



As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:



Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:



As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble. Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation. I don't believe there has ever been such a large intervention effort in our country, at least in the last 150 years. Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful. However, (economic) life is not that simple.

From an "all things considered" standpoint, I don't believe the residential real estate bubble has actually burst. It appears to me that it has somewhat deflated. I base this view on a variety of fundamental and technical factors.

Assuming this view is correct - that the residential real estate hasn't popped - the implications are immense. I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion. The first possibility is a "successful" reflation of the residential real estate market, with accompanying economic activity. The second possibility is a collapse of the residential real estate market with accompanying economic repercussions. As to the path real estate will travel from here - my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a "successful" relation occurs, one is led to wonder as to the characteristics of such a "successful" reflation of the real estate bubble. Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006. Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.


SPX at 1137.37 as this post is written

More On The Fannie/Freddie Developments Of December 24

Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac. This editorial provides some new perspectives on the matter:

http://online.wsj.com/article/SB10001424052748704152804574628350980043082.html

My original comments on these developments was on December 28.

I feel it is critically important to understand the extent of intervention as it pertains to the housing market. Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts.

SPX at 1135.43 as this post is written

Ben Bernanke's January 3rd Speech

I would like to make a couple of comments regarding the speech Ben Bernanke gave on January 3. It was titled "Monetary Policy and The Housing Bubble," and the pdf link can be found here:

http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.pdf

I could make a significant amount of comments regarding this speech, as I partly or fully disagree with many of the points presented.

I will, however, briefly comment on a couple aspects of the speech. First, from page 21:

"Although the house price bubble appears obvious in retrospect--all bubbles appear obvious in retrospect--in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets."

I agree with the general premise that bubbles aren't always obvious. As I said in my December 2 post, "Some bubbles are harder to spot than others." As far as the housing bubble was concerned, in my opinion it was a relatively easy bubble to identify as it occurred, based upon a variety of characteristics.

Second, from page 22:

"That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs."

I think it can be strongly inferred from this excerpt, as well as other statements that he has recently made, that he doesn't believe there are asset bubbles currently in existence. My analysis indicates otherwise, as I discussed in my December 2 & December 16 posts.

SPX at 1136.43 as this post is written

Ponzi Schemes

Occasionally I have written about investment frauds. My last post on this topic was on November 27.

Here is a story from December 28 titled "Ponzi collapses nearly quadrupled in '09":

http://finance.yahoo.com/news/AP-Ponzi-collapses-nearly-apf-898755198.html?x=0&sec=topStories&pos=4&asset=&ccode

While I find this article's statistics to be of interest, I do not necessarily agree with some of its commentary.

Of course, there are many types and permutations of investment frauds, of which Ponzi schemes are just one type.


SPX at 1132.99 as this post is written

Consumer Confidence Disparities

Here is a link to the latest (December 29) press release of The Conference Board's Consumer Confidence readings:

http://www.conference-board.org/economics/ConsumerConfidence.cfm

I found the large difference between the Expectations Index and Present Situation Index to be notable. The Expectations Index, at 75.6, was the highest in two years. However, the Present Situation Index fell to 18.8 and remains at a 26-year low.

SPX at 1115.1 as this post is written