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Five Things You Need to Know: Media Reports on Bernanke Imperfectly Anchored; Daily Subprime Roundup; Can't Sell Your Home? It's Probably Because You're Poor!; Small Business Points to Current Location in 25-Year Credit Cycle; Birth/Death Model


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Media Reports on Bernanke Imperfectly Anchored

Seeing the bullet points roll by on Bloomberg and the wire services as Federal Reserve Chairman Ben Bernanke spoke on inflation yesterday was interesting. One could almost get the sense he was discussing something important about Fed intentions toward future interest rate policy. But nothing could be further from the truth.

  • Headlines yesterday screamed: "Bernanke Says Inflation Expectations Are Imperfectly Anchored"
  • Sounds dire. But what does that really mean?
  • When Bernanke says inflation expectations are "imperfectly anchored" and that the inflation rate the Fed prefers "is not fully known by private agents,'' it is not a statement about what the FOMC will do next as media reports implied.
  • Instead, it was an opportunity for Bernanke to discuss academic issues relative to inflation expectations and make his case for moving the Federal Reserve toward explicit inflation-targeting.
  • Explicit inflation targeting is currently practiced by a number of central banks around the world, including the European Central Bank, Australia, Canada and New Zealand.
  • Inflation targeting sets specific numerical goals for inflation and a timetable for achieving those goals, and also places some constraints on what monetary policy a central bank can conduct.
  • Former Fed Chairman Alan Greenspan (as well as a number of current Fed members) has always been against inflation targeting.
  • This is what Greenspan means when he says he believes monetary policy should remain "flexible."
  • On the flip side, whenever Bernanke (or other members of the Fed) mentions central bank "credibility" he is making a thinly-veiled reference to the adoption of inflation-targeting by the Federal Reserve.
  • Similarly, his concern over "transparency" and inflation "anchors" are specifically expressions of his goal to move the Fed toward adopting inflation-targeting.

2. Daily Subprime Roundup

In what is becoming a daily agenda item, here is a roundup of the latest in well contained subprime mortgage news.

  • First up, Moody's Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages after Standard & Poor's yesterday said it may cut $12 billion of securities, Bloomberg reported.
  • Moody's cut ratings on 399 bonds issued in 2006 and said it may reduce rankings on another 32.
  • S&P said it may soon lower ratings on a whopping 2.1% of the $565.3 billion worth of subprime bonds issued in a relatively small timeframe between late 2005 through 2006.
  • Yes, that's 2.1%.
  • Meanwhile, US Housing and Urban Development Secretary Alphonso Jackson told Bloomberg this morning that 20% (hey, that's almost 10 times 2.1%) of subprime loans are "pretty bad."
  • Jackson also noted that consumers were "snookered" by subprime lenders.
  • Oh yeah, General Electric (GE), which in the first quarter took a $500 million pretax charge to cover subprime mortgage losses, may take an additional $200 million charge when it reports second quarter earnings on July 13, according to the Wall Street Journal.
  • "We have a fence around the issue," Mark Begor, head of GE's consumer finance for the Americas, assured investors at the time the initial charge was taken.
  • And then there's the National Association of Realtors hitting the tape this morning, forecasting that the U.S. homebuilding slump will last through 2008.
  • Based on NAR forecasting standards, that likely means the U.S. homebuilding slump will actually never end.

3. Can't Sell Your Home? It's Probably Because You're Poor!

The New York Times this morning reported that after a detailed analysis of real estate records in the city, if you can't sell your home it's probably because you're poor.

  • In the New York region, sales at the top end of the housing market - that is, homes in the most expensive 5 percent of the market - have rising, while sales in the middle and bottom of the market have been falling, a Times analysis of housing data revealed.
  • The same is true in the San Jose, CA; Seattle, WA; Denver, CO; and Houston, TX areas, the article said. 1).jpg" width="241" align="right" />
  • Separate statistics from the California Association of Realtors also show million-dollar-plus homes to be selling better than the lower and middle markets in that state.
  • The newspaper actually cites three drivers of the split market:
    1) Healthy income gains and a rising stock market that benefit affluent families
    2) An influx of foreign buyers (hey, seen the dollar versus the euro or pound lately?)
    3) The recent rise in interest rates and the problems in the mortgage market have had a much bigger effect on low-income and middle-class buyers than affluent ones.
  • This proves the Federal Government Theory of Housing Well Containment correct.
  • Housing woes are indeed well contained to just the 95% of the market that does not comprise the top end.
  • The bottom line? There's no problem in housing unless you need to sell your house for the money.

4. Small Business Points to Current Location in 25-Year Credit Cycle

"Usually optimistic" small business owners are apparently growing increasingly worried about the economy, according to a survey conducted by the National Federation of Independent Business.

  • The National Federation of Independent Business Small-Business Optimism Index fell 1.2 points in June, to 96.0.
  • The Index has now been below its historical average (100.2) for 15 of the past 16 months and below 100 during all of 2007, the NFIB said.
  • Plans for capital expenditures over the next few months fell a point to 28 percent, the survey said.
  • What about inflation?
  • The net percent of owners reporting higher average selling prices rose to a seasonally adjusted 19 percent in June, three points higher than in May.
  • Unadjusted, 31 percent reported raising average selling prices.
  • And how about some clues as to where we are in this particular credit cycle?
  • A scant 3 percent of owners cited the cost and availability of credit as their number one business problem.
  • The record high of 37 percent reporting cost and availability of credit as their number one business problem was achieved in... anyone?... anyone?... 1982.

5. Birth/Death Model

An interesting read this morning from Bloomberg's Caroline Baum (one of our favorite financial columnists - outside the Ville, of course) about the Birth/Death Model used by the Bureau of Labor Statistics to "calculate" employment.

  • "Friday's employment report supposedly settled the debate, once and for all. With the addition of 132,000 non-farm jobs in June, the U.S. economy was back after limping along for several quarters," Baum notes.
  • "Strong job growth is sure to keep the consumer spending. Or is it?" she asks.
  • With the help of Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago, Baum begins to dig around in the the murky waters of the BLS' Birth/Death Model:
    "Each month, the BLS surveys 160,000 employers at 400,000 worksites to produce an estimate of non-farm employment. It supplements this sample survey with a model-based estimate of new business formation. The so-called net birth/death model generates an unadjusted monthly estimate, which is added to the unadjusted sample survey before the whole piece is adjusted for seasonal fluctuations."
  • Kasriel notes that as the economy has slowed in the past year, the relative contribution of the birth/death adjustment to unadjusted payroll growth has increased to 56% year-over-year as of June, compared to 31% year-over-year in March.
  • It's curious that the contribution has been trending higher as the percentage of small businesses saying now is a good time to expand has been trending lower, Baum observes.
  • Curious indeed.
  • As we've noted here before, the real issue with the Birth/Death Model is not so much that the BLS is attempting to estimate non-farm employment, but that the BLS literally refuses to open up the model for evaluation by any private body or organization.
  • Is it a good model? Who knows? We'll just have to take their word for it.
  • Finally on a related note - literally! - we received this note in response to our question on Monday how in the world construction jobs could show gains even as housing is declining (see the NAR forecast for U.S. homebuilding, for example):


    I enjoy your "5-things" very much each day but wanted to comment on Monday's #3 - jobs-a-plenty. It seems to me that the BLS numbers have a built in weakness in that they can only record and report legal laborers and much of the residential/home construction may be done with undocumented illegal immigrants. Thus, when there is a downturn in demand for workers the first to go are the ones that were never documented to start with.

    Makes one wonder how much faith (if any) to place in reported government numbers and statements in the first place. Keep up the good work.

  • Thanks, Dad!
  • We'll take our fans wherever we can find them!
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