The Economy Guy

Issue: 10/25/07 Thursday

Today was a great day if you are in the commodities market or the currency market.  The stock market went sideways again.  Bulls = Bears.

The Euro set a new high, oil set a new high and told set a recent high.  Bet that didn’t help many people’s 401K’s.

So, let’s look at today’s news, and interpret it a little.

Every time economists and Wall Street executives think they have acknowledged the full extent of the losses from the meltdown in real estate mortgages, more bad news turns up.  Merrill Lynch said yesterday that it would take a charge for mortgage-related securities on its books that is $3 billion more than the $5 billion it expected just two weeks ago. And a report from the National Association of Realtors showed that sales of existing homes in September fell twice as much as economists had expected, to their lowest level in nearly 10 years.  At this juncture, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion.  That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists.

So that’s real news.  This last sub-prime mortgage fiasco will cost about $400B, and compare that to the S&L crisis so long ago that cost us $240B.  By the way, I do mean US.  That last tidbit is real scary.  There will be a decrease in real estate value of $2T to $4T.  That means a lot less expendable money from people refinancing that valuable real estate.  WOW!!!!!!!!!!  And, these are only estimates.  The real numbers won’t be known by a few years.

In a new report to be issued today, the Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with sub-prime mortgages. That estimate is far higher than the Bush administration’s prediction in September of 500,000 foreclosures, which in itself would be a tidal wave compared with recent years.  The Joint Economic Committee estimates that the lost of real estate wealth just from foreclosures on sub-prime loans will be about $71 billion. An additional $32 billion would be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood.

Okay, do you want some more good news???  Read between these export lines.

China has surged ahead of Germany for the first time to become the world’s top exporter, prompting ever louder demands from the United States and Europe to revalue the yuan. Data from the World Trade Organization show that the country vaulted past the US at the beginning of this year and has since moved at lightning speed to eclipse Germany’s once indomitable export machine. It shipped $111bn (£54bn) worth of goods in August, up 55pc from a year earlier.  Now boasting 8pc of global exports – three times the Britain’s dwindling share – China has jumped up the technology ladder. Machinery, equipment and cars now make up 46pc of total exports, while textiles are fading from the picture.  Beijing let the yuan break through the key barrier of 7.5 to the dollar yesterday, but seems determined to resist Western pressure for faster appreciation.  US Treasury Secretary Henry Paulson said it was in China’s own interest to let the yuan rise, given the clear signs of overheating. -Beijing’s policy of holding down the yuan through purchases of US and other foreign bonds has caused reserves to mushroom to $1,430bn, driving up inflation to 6.5pc.

Did you get that picture?  The Chinese hold $1.4T of bonds.  Ugly if they decide to ever sell any of those.  That would cause instant inflation in the USA.

And here is the currency story.

The dollar fell lower against the euro following a Thursday report that showed orders for manufactured goods in the United States fell unexpectedly in September.  The euro bought $1.4316 in afternoon trading in Europe, above the $1.4256 it bought in New York trading the night before, and closer to the record $1.4348 it bought early Monday. The dollar’s dip came after the U.S. Commerce Department reported that orders for durable goods dropped 1.7 percent last month following an even bigger 5.3 percent plunge in August. It marked the first back-to-back declines in more than a year and took economists by surprise.

And here is some good news on sale of NEW homes.

Sales of new homes posted an unexpected gain in September although the improvement came after sales had fallen to the slowest pace in more than a decade.  The Commerce Department reported Thursday that sales of new homes rose by 4.8 percent last month to a seasonally adjusted annual rate of 770,000 units. That level of activity was still 23.3 percent below a year ago, indicating that housing remains in a steep downturn.

Is there any surprise that new home sales jumped and used house sales slumped???  Well its no surprise to me.  I recently joined my son looking for a house to buy.  We looked at some stunning brand new homes, and the discounts being offered were eye-watering.  Oh, by the way, they were very open to offers below their offered prices.  The next conclusion is that used house prices must come in line (below) new house prices in areas where they compete.  Too easy to predict.

Here are Thursday’s closing details:
DJ30 – 13,672 (Down 3 points)
10 year US Treasury Bond – 4.35%  (Up 0.02%)
Euro 1.4327 – Here we go on a new ride up with the Euro!!!!!!!!!!

Gold closed at $771 per ounce. (Up $5) – And the band plays on.
Oil Closed at $90.46 (Up 3.36) – Yikes!!!!  What a jump in prices.
Gasoline is $2.24 (Up 0.09) – Don’t worry, you’ll be paying more at the pump.