Housing prices have now fallen further than they did during the Great Depression

• The last time that happened, it took nineteen years to recover.
• 4 million homes have been lost to foreclosure since 2006.  
• Goldman Sachs cut its economic growth forecast for the second time in a month last week. It now predicts the economy to have added just 150,000 jobs in April, down from 244,000 in March.
• Economic growth is under 2%.
• Gas prices, food prices, and rental prices are increasing.
• May 31st,  14.5% of the American public received food stamp benefits that averaged $133.24 per person, up over 10% since January past. 
• The number of limousines owned by the U.S. government increased  73 percent during the first two years of the Obama administration, 
• The Democrats have not a clue and neither do the Republicans and Obama plays golf.

When You are at Peak, Which Way is Next?

To appreciate the amount of oil that we consume I have added a video (two years old, but not much changed) that illustrates the amount. I have also  added a thoughtful analysis on the current demand for housing in the US. Gasoline at the pump is rapidly increasing to the $4 per gallon mark. Oil price reachesd to a new 30-month high of $108 per barrel. Where is this going? Where do you think?

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US peak profits warning from Chris Mayer
Posted on 02 April 2011 Arabian Money

Rising star of the US financial newsletter world Chris Mayer has a stark warning for readers in his latest issue of Capital & Crisis. Profit margins in the US have reached unprecedented levels and can now only fall as commodity price inflation hits home.

‘One of the vulnerabilities in today’s market is that profit margins are near peaks’, he says. ‘Investors tend to like companies with fat profit margins, but high profit margins are like honey pots that attract competitors. They are rarely sustainable for long’.

Top ten crisis

If you take a list of the top 10 technology stocks in the US Nasdaq market then the average net profit margin is around 25 per cent, and similar high profit margins are also seen across the S&P 500 stocks. The boost to profit margins has come from cost cutting in the downturn, mainly in the form of job cuts that do nothing to boost domestic consumer demand.

‘Today, though, I doubt many of these firms have much more to cut,’ suggests Mayer. ‘Instead, the focus is now growing sales and taking business from competitors or defending an existing business. The focus, too, is how to deal with rising raw material costs. All of these put enormous pressure on margins. We should expect to see them fall.’

That of course is the contrarian view. It is not what the bulls of Wall Street are saying. They see a recovery in the US economy that is raising all boats.

If the Wall Street consensus is again wrong then the reverse will be true and all boats will sink. Mr Meyer is stock picking to locate the boats that will stay afloat, so at least he is thinking in the right direction. But the tendency always is for the good to get cast down with the bad, particularly if the numbers are overwhelming.

Naturally this situation is most dangerous when company profits have recovered sharply and the domestic economy is still in the dumps. And what do US auto and house sales figures quite clearly show us?  The domestic US economy is still in a depression with activity well down on the boom years.

Domestic depression


(US auto sales down 19% last year and that’s for smaller cars)
(US disposable incomes drop for the first time since September)

Now if domestic demand is not rising, and indeed consumer personal disposable income is falling  then what prospects are there for pushing up company revenues to keep profits surging ahead? You have to look to exports and repatriation of multinational income.

Yes but does the world not have a few worries of its own right now? To briefly summize: Japan just had its worst earthquake in history and nuclear reactors are leaking plutonium; the UK is facing three years of austerity; the eurozone has a massive debt crisis; and the Middle East and North Africa is in a state of revolution, civil war and protest that has pushed oil prices to a two-year high.

Will Asian sales hold up under these circumstances? Or will stocks sell-off and the dollar rally, making US exports uncompetitive again? This peak profits warning is very well timed.

64.5 Million Housing Units Empty in China

ANYBODY HOME?: An apartment complex in Pudong District, Shanghai, was ready for buyers in April 2010. It's estimated that tens of millions of apartments in China are now empty as buyers hold them as investment rather than homes (CHEN FEI)


Vacant But Not for Sale
Andy Xie, an independent economist based in Shanghai, said the huge number of empty apartments foreshadows a bubble burst

BY LIU YUNYUN Beijing Review

Housing market speculation in previous years has resulted in an "empty apartment" phenomenon—houses and apartments are purchased as investments but left unoccupied. Various Chinese media outlets reported that about 64.5 million urban electricity meters read zero in the first six months of this year in empty apartments across the country. Andy Xie, an independent economist based in Shanghai, said the huge number of empty apartments foreshadows a bubble burst in an article recently published on Century Weekly.

Edited excerpts follow:
Property bubbles can be divided into two kinds—quantity bubbles (too much supply) and price bubbles (too expensive). China, however, is facing a combination of the two.

The Chinese property bubble is different from that of other countries since it has a huge supply while prices also run high.

China's urban housing stock is mainly composed of housing built by enterprises or government organizations for their employees, and some 60 million private housing units built over the past 10 years. Property developers are now building about 20 million private apartments, and local government-owned land reserves may be enough for another 20 million to 30 million.

Even if the stock of empty apartments is less than 64.5 million, the number would still be equivalent to 20 percent of the total urban housing supply, which is higher than Taiwan's vacancy rate at the peak of its bubble at the end of the 1980s. Moreover, as credit policies are loosened, the stock could rise to more than 30 percent.

In mature markets, the property price is usually twice that of a person's monthly income. In many Chinese cities, the per-square-meter property price is five to 10 times the average monthly income for local residents—a clear indicator that bubbles are forming.

A price bubble can damage the economy in three ways. First, it usually leads to a banking crisis. As the market trades at higher and higher prices, buyers borrow more against the same property. Banks that maintain the same lending cushion with, say, a 30-percent down-payment rule, suffer losses when prices fall below that level. A banking system in crisis cannot function properly, and the economy suffers collateral damage due to this dysfunctional banking.

Second, the wealth effect—increased spending due to an increase in perceived wealth—leads to excessive consumption during a bubble. The backlash weakens an economy for several years.

And third, bubble-induced demand distorts supply. When inflated industries plummet after a bubble burst, it takes time for other industries to take their place.

Unique in China

I think the vacancy rate for the country's private and commercial housing stock is between 25-30 percent, nearly double that of a normal market. But price hikes along with a high vacancy rate are inexplicable.

China's phenomenon is unique for at least four reasons.

A sustained negative real interest rate has led to a falling demand for money and a rising appetite for speculation. Inflation fears and greed are working together to form unprecedented speculative demand for property.

Second, a massive amount of "gray" income is seeking a safe haven. This "gray" income could be around 10 percent of GDP. Due to rising inflation and a depreciating dollar, a currency that used to be a traditional safe haven, the booming property market has become the place of choice to hoard money.

Third, few people in China have experienced a property bubble. The property crash in the 1990s only touched a small segment of society, mainly foreigners and state-owned enterprises. Geographically, it was restricted to the country's developed regions including Hainan, Guangdong and Shanghai. Most people don't have a firm understanding of what a property crash is, and this ignorance has led to a lack of fear for runaway speculation.

Fourth, speculators are confident that the government won't let property prices drop. They surmise that local governments rely on property deals for revenue and do all they can to prop up prices. But their faith in the government is misplaced. The government can delay, but not deter, a bubble burst. Nevertheless, faith in the government is stronger than fears, and speculative demand will continue to grow as long as credit is available.

Government dilemma

Right now, tight credit is holding the market back, and supply is piling up. The government's tightening measures are squeezing out buyers looking for second and third homes, and transaction volumes across the country have collapsed.

When the policy is relaxed—as most expect—speculation will probably revive and lead to a doubling in the total value of speculative inventory.

In some cities, banks are loosening credit a bit. Why? Because local governments have a lot of debt—commonly five times more debt than revenue—and could find themselves in financial trouble without a decent level of property transactions.

Local governments have depended on real estate transactions for revenue and could default if the market falls too far. Thus, the Central Government may loosen its policies to help the local governments. Such a change of attitude would ease short-term government difficulties but double the trouble down the road before the property bubble bursts.

Market solutions

At this point, an interest rate hike would be the best option. Raising interest rates would cool speculative demand gradually, and at the same time avoid market disruptions. A delay in raising interest rates would only cause a surge for the stock of empty apartments.

In the long run, local governments must find ways to increase sources of non-property revenues or simply limit expenditures. The investment-led growth strategy adopted by all local governments will inevitably lead to maximized revenues from land sales, but unless limits are put on this strategy, the property market cannot function normally.

Property taxes could be a new and better source of revenue. In many countries, property taxes constitute a big proportion of local governments' revenue and finance public services. China should adopt the same model, coupled with cuts in government expenditures.

What happened to the U.S. economy now serves as a good lesson for Chinese decision makers. Policymakers should act now to alleviate the housing problem, since a crash in the real estate industry could bring down the whole economy. In my opinion, it is very likely the Chinese property market would collapse much like the United States did in 2008.