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Weldon's Money Monitor

By

If "it" really does hit the fan... you're gonna need an umbrella.

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Under the leadership of Chairman Alan Greenspan, the Fed has been very transparent, and their measured pace has been well projected by the FOMC.

Using a baseball analogy, the Fed is in the eighth inning of the tightening game, and has been clear in their plan to hike rates by 25 basis point per inning.

We have the ninth inning coming up in June.

In other words ... GAME OVER ???

According to 'new' Dallas Fed Regional Bank President Richard Fisher, game over.

In fact, the comments highlighted above are nearly verbatim, extracted from Fisher's commentary posed during today's television interview with CNBC's 'pit-bull' Steve Liesman.

Indeed, by prefacing his CNBC bombshell analogy with Sir Alan's name, it seems almost plausible to suggest that a trial balloon has just been 'floated' by the FOMC itself ... within the context of introducing their newest, articulate, straight-shooting member.

The markets are sure acting in kind, with the 10-Year US Note yield finally cracking the 3.98% level.

BUT, there is MUCH MORE going on here than meets the eye ... as pertains ... specifically ... to the intensified global trade competition, and slowing final domestic demand OUTSIDE of the USA.

Perhaps ... the FOMC realizes ... that the US consumer will again be NEEDED to support the global economy, which from many angles not visible to the domestic US eye, looks like it is barely clinging to a precipice, with a ravine of disinflation bubbling below.

The FOMC might realize it can go NO further without risking the global economic balance, which is held together by an increasingly THIN 'thread'.

So, the US consumer ... and ... the US HOUSING MARKET ... will chug along, as the Fed acquiesces to the peripheral reflation bubble as a codependent partner, as pertains to continuing to 'float' the US consumer.

OR ... does the Fed see, sense, fear ... something else ???

Might the Fed fear that the housing bubble is about to BLOW, and they are floating a trial balloon in terms of a ninth inning 'closer' to set down the tightening tack that has begun to THREATEN the bubble itself ???

Again, there may be more going on here than meets the eye.

And if that is true ... watch 'it' hit the fan.

Note the 'fearful' comments from Atlanta Fed Regional President Jack Guynn last week ...

... "There are some markets, especially in coastal Florida, where I have heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation. It makes me very uncomfortable. Some buyers, some builders, some lenders, are going to get burned in some of these local markets."

BUT, Guynn totally forgot to mention the most important cog, the consumer/homeowner, many of whom are ALREADY GETTING BURNT, as defined by a SOARING 'Foreclosure Rate', nationwide. Indeed, note the following statistics drawn from Realtytrac.com that may well have gotten the attention of the FOMC:

• During March and April, Foreclosure Rates rose in 47 of the 50 states.

• During March and April, cumulatively, nationwide Foreclosure Rates rose by +19.6% ... or ... at a + 117.6% annualized pace over the last two months.

• Arizona, Nevada, and Florida ...three of the HUGE new 'golf-development' states that we highlighted in an April Money Monitor focus ... are in the TOP FIVE states, foreclosure-wise, and ALL THREE post rates more than TWICE the national average.

• Texas had the highest proportional foreclosure rate, with one property out of every 694, into foreclosure.

Worse yet, particularly hard hit have been key urban areas such as New York City, Chicago, Philadelphia and Boston, where 'working-class neighborhoods' are experiencing a rapidly rising number of foreclosures.

Note comments made Monday by the US Comptroller of the Currency Julie L. Williams ...

"We are clearly seeing a spike in foreclosures in a number of our major urban areas. If we are not careful, the American dream can quickly turn into the American nightmare."

Could it become ... welcome to my nightmare ... for the Fed ???

Indeed, from our office in the Garden State, we can hear the horrific screams penetrating the nighttime air as local homeowners are increasingly waking up to their own nightmares ... ala April's HORRIFYINGLY HUGE forty percent single-month increase in New Jersey's property foreclosures

Yes, the number of New Jersey properties that entered foreclosure during April soared by 40%, from March.

SO, now we can add rising distress ala foreclosures that are actually taking place ... to the HUGE build in the supply of unsold inventories of homes that have not even been 'started' ... to create one hell of a potential nightmare scenario for the US consumption-demand-dynamic.

VOILA ... evidence the following statistics released last week by Foreclosures.com:

• Single Family Homes for Sale in Las Vegas ... up + 71.4% yr-yr in April.

• Foreclosures in Las Vegas ... up +8.3% month-month in April.

Note comments from Foreclosure.com President Alexis McGee ...

"Investors represented over 25% of the homes sold during 2004. Foreclosures are up in the first quarter, and now speculators have cut down on buying, and are cashing out."

Ouch.

Florida, Vegas, Arizona ... foreclosures up, speculators looking to cash out, unsold supply through the roof ... welcome to the American dream turned nightmare !!!

Well, perhaps another slide in mortgage rates can save the day in terms of filling demand for all those foreclosed, and not yet-started homes that are coming onto the sales block, an event already in motion thanks to the signals being sent by the Fed, and the global economy. Perhaps even CHEAPER financing can reflate the foreclosure disinflation trend, right ???

Perhaps NOT.

Note the subtle, and MOST OMINOUS macro-message that may be emanating from within today's Mortgage Banker's Association's weekly Mortgage Index data:

• Purchase Index ... 462.7 ... down (-) 4.1% in the latest week ... and ... down a sizable 63.5 points in just the last three weeks, a decline of (-) 11.8%.

The OMINOUS part of the message comes from the FACT that the decline in mortgage demand for home purchase comes DESPITE a 16 basis point DECLINE in the MBA 30-Year Mortgage Rate.

Indeed, since the first week of April, Mortgage Rates have PLUNGED from 5.95% (week of April-8) to the current level of 5.61%, a deep decline of 34bp ... during which time the MBA Purchase Index has fallen by (-) 2.5%

Ahhhhhaaaaahhh ... a new Fed conundrum, on the disinflationary flip-side ???

And, the thing that makes this ALL the MORE interesting is the FACT that lenders are STILL 'easing' their 'credit standards' for consumer installment loans, as per the April Fed Senior Loan Officer Survey ... despite the rise in foreclosures, and the slowing demand for loans. Observe the RECORD EASY stance by banks, when it comes to making consumer loans, as defined in the chart on display at the top of the next page, extracted from the Fed's web-site.

At the core ... is competition.




Somewhat surprising is the 'passion' with which banks are willing to make consumer loans, given the shift towards a LESS aggressive pursuit of mortgage lending customers, as per the 'decline' in the 'easiness' of credit standards for mortgage borrowing, as shown in the chart below.





Welcome to the Nightmare ... as banks are NOT as 'easy' in their mortgage lending, amid rising foreclosures, less intense investment demand, over-leveraged borrowers, a potential supply glut ...

... and ... DESPITE ... falling interest rates.

Tougher standards could provide the proverbial straw that breaks the back of the bubble, and thus breaks the back of the Fed ... if ... it reduces the ability of buyers to 'consume' the oncoming tsunami of unsold supply.

Of potential interest to the FOMC, we dig deeper to note that intensified competition among lenders is now beginning to have a similar reflationary influence on the Commercial and Industrial sector. Note some of the Fed's April Senior Loan Officer Survey text ...

... "Seventy percent of domestic and foreign banks narrowed their spreads of loan rates over their cost of funds for these borrowers in the three months ended April, up substantially from forty-five percent in the January share, and the largest percentage reported since these questions were added to the survey in 1990. Of the respondents, forty percent had reduced the cost of their credit lines, and about one-fourth had eased covenant restrictions, increased the maximum size of loans, or both. All institutions that eased their lending standard and terms over the last twelve months cited more aggressive competition from non-bank lenders as a very important reason for doing so.

More to the point, amid shrinking global 'returns' ...

... "A notable share of respondents that had eased standards or terms also indicated that a change reflected a higher tolerance for risk and greater liquidity."

BUT, ominously ... demand for C+I loans ... is slowing. Note:

• 37% of institutions reported an increase in demand for C+I loans from large and middle-market firms ... down from 45% in January.

AND ... in a twist-of-irony that is perfect for today's Money Monitor, we note that even the firms that HAVE reported greater final demand for C+I loans, note such because of the RISE IN INVENTORIES of UNSOLD GOODS. Observe more of the Fed Loan Officer Survey text ...

... "The respondents experiencing stronger loan demand most frequently pointed to increased inventory financing needs."

No kidding, an unwanted inventory build ???

No kidding, and NO surprise to readers of the Money Monitor, as an unwanted inventory build at the retail, and producer levels has been one of our PRIMARY focal points ALL YEAR. Hence, the erosion in the Institute for Supply Management should come as NO surprise either, particularly the quick-feed-through as mapped out from an UNWANTED inventory build, to a deepening decline in backlogs, thru to a renewed sub-fifty reading in Employment ...

... and thus ... solidifying the disinflation dominance as per the complete LACK of wage-income reflation, a primary Money Monitor macro-theme. Observe the statistics as released today by the ISM:

• Backlog of Orders ... 51.0 ... down significantly from April's 53.0, down five full points in the two months since posting a 56.0 reading in March.

• Employment ... 48.8 ... down from 52.3 in April, down from 53.3 in March, down from 57.4 in February, and thus completing a six-month consecutive YTD-2005 slide from January's reading of 58.1, and hitting an eighteen month low in the process.

Observe the slide in the ISM Headline Index, as plotted in the chart on display below, coming courtesy of our buds at briefing.com. In fact, the ISM Index has now fallen in 11 of the last 12 months, during which time it has plummeted from above 62.0, to the current reading of 51.4. We'd call that ... a DOWNTREND.



Perhaps even more 'telling' in terms of the severity of the macro-shift that is now well underway, is the persistent monthly decline in the ISM Import Index posted in each of the first five months of the year. Observe the data:

• Import Index ... 53.9 ... a near-two-year LOW, falling from 56.7 in April, down from 58.9 in March, down from 60.7 in April, and down from the 61.1 reading posted in January.

Moreover, as evidenced in the chart below, the plunge in the Import Index (red line) violates the uptrend in place since the 2001 macro-low, a KEY consideration given the SEVERE MACRO-EROSION already taking place in Europe and Asia.



And as if more was needed ... we note the COLLAPSE in the ISM Price Index, as shown in the chart below (black line) amid the plunge to a barely 'positive' 50.8 reading posted in May, a virtual collapse from April's 71.0 result. We note several other angles on the price-front:

• Firms Reporting Prices Lower ... 16% ... up significantly from the 10% posted in April, and more than TRIPLE the number of firms, 5%, that said prices were falling in March. During that same time, the percentage of firms that report higher prices has fallen to 32%, from 51%.

Reflationary price pressure is FAR LESS intense now, than it was just two months ago, as the 1Q came to a close. Also note a growing list of commodities coming under downside pricing pressure:

• Commodities Down in Price ... Aluminum Coils, 1st month (on the list) ... Ferrous Scrap, 1st month ... Natural Gas, 1st month ... Steel, Cold-Rolled, Hot-Rolled, and Scrap, 3rd month.

Industrial metals prices are disinflating at the producer level, giving credibility to anecdotal reports of rising inventories of raw materials.



Less noticed, but perhaps more important in terms of providing clues as to what is coming down the pipe in the med-term future, we observe the updated macro-forecasts offered by the ISM:

• Prices ... expected to rise just +0.4% over the next seven months of 2005, FAR LESS than the increase of 5.1% cumulatively during the first five months of the year ... a MASSIVE trend towards DISINFLATION

And MOST telling ... as to WHY:

• Production Capacity ... expected to expand by +3.5% this year alone, thanks to a +9.8% rise in capital expenditures.

Gee, imagine that ... increased output capacity in the US, amid LESS import demand for the increased output capacity in almost every other export-goods-producing nation.

Maybe ... the Dallas Fed President was simply over-passionate about his OWN belief and sense of what the appropriate monetary stance would be, as some pundits have opined in the CNBC aftermath ... it could be so ...

... OR ... maybe the FOMC is using the Dallas Fed to float its monetary trial balloon, amid hints of FEAR on the rise, fear that the global economy is increasingly at risk, ala its intensifying co-dependency and incestuous links to the US consumer, and the housing reflation bubble.

Observe the end-result, as Doctor Market's prognosis appears to concur with that offered this morning by Richard Fisher, visible in the daily chart on display below, plotting the Dec-05 Eurodollar Deposit contract.



Likewise, observe the NEW HIGHS being set today by the Dec07/June05 spread, in the chart below, rallying from 175 basis points, to 50 bp.



We have been talking about the US Anglo-partners, having highlighted the fixed-income dynamics in New Zealand, Canada, and the UK ... not to mention Australia. Indeed, note the upside price breakout witnessed last night in the Australian Bank Bill market as evidenced in the daily chart on display below.




MORE telling, and perhaps a sign of things to come in the US Eurodollar strip, we observe the chart on display below in which we plot the June-06/June-05 Aussie Bankers Acceptance (Bills) Rate spread. Indeed, the spread has spiked into an INVERTED state, implying that the next monetary move from the hawkish-minded RBA will be towards ... ease.



As we stated last week, the impetus for the yield on the 10-Year Note to finally penetrate the formidable 'resistance' posed by the 4% level is stronger now than it has been at ANYTIME IN THE PAST.

VOILA ... the 10-year yield is now following the lead of the longer-end 30-year yield, and, the curve is actually steepening, as the shorter-end begins to play 'catch-up'.


Within this same context ... we note the move in Canadian yields to NEW ALL-TIME LOWS today, easily blasting thru 'resistance' at 4.25%, last trading all the way down to 4.09%. Observing the overlay chart on display below, we note that the Canadian market is leading the way LOWER, yield wise.



And finally, we note another focal point we have been hyping ... as per the potential macro-significance of a breakdown in two of the currencies that have NOT yet succumbed to dollar appreciation ...

... the Russian Rouble, which got CREAMED today, seen in the chart below ...



... and the Korean Won, which also broke down today.

We have been LONG saying what the Fed and the markets are now beginning to believe ... that reflation is NOT a one-way street, and that the global economy is NOT strong enough to stand alone, without the US consumer providing the engine of final demand growth.


Europe is rupturing, and slipping deeper into a competitive depression.

Asia is exhausted, with INTENSE competitive pressures building.

And now, the US home-owner/consumer is facing down increasing housing-debt distress without any wage-income reflation support.

Thus, final demand is slowing, exporters are choking, the USD is rallying, backlogs are contracting, the labor market continues its secular erosion ...

... and the Fed sends up a trial balloon, suggesting that a continued measured pace of rate hikes may not be necessary, causing global fixed-income markets to respond accordingly, exactly as 'planned'.

The puppet-master lives, and yes, the Fed's rate-hike game is almost over ...

... BUT, this merely means that the REAL game ... is just beginning.

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