We continue to be bombarded by bad news. The economy to be sure is down, real estate prices continue to decline, although at a reduced rate, there is still a large inventory overhang, somewhat smaller than before and consumers are feeling the pinch of much higher fuel and food prices.  But this coming week we can expect the Fed to reduce interest rates again, but by a smaller margin and the first estimates of GDP growth in the first quarter of 2008 to show that the economy might even have expanded in the quarter. 

The Financial Times reported this week that private equity funds that were launched during the last economic downturn in 2001, struggled to raise their equity but greatly outperformed funds formed in better economic times.  This data clearly supports the argument that now is the time to seek opportunities.

On April 27 2007 the LJL Secured High Income Fund I LLC funded its first mortgage. Since that day a year ago the fund has grown substantially in assets and in loans and returned to its investors an investment return in excess of 10.5%. Those investors selecting a monthly interest payment received their funds every month on the 15th and those who elected to reinvest their interest enjoyed the benefits of compound interest. Two investors even withdrew some of their investment and were redeemed promptly.

The success of the first year was accentuated by the fact that the past year was probably one of the most challenging years in the real estate, mortgage, credit and financial markets since the depression in the 1930’s.

YET another big rate cut: until recently that is exactly what many investors were expecting of the Federal Reserve's next policymaking get-together on April 29th and 30th. After all, bold rate cuts have become the Fed's hallmark. Between late-January and mid-March, America's central bank slashed short-term interest rates by two percentage points, to 2.25%, as it staunchly sought to cushion America's economy from the fallout of the credit crunch. Earlier this month, Fed funds futures indicated that financial markets expected the trend to continue, with at least a quarter-point cut on April 30th and a 50% chance of a half-point move.

No longer. Expectations have shrivelled in recent days, and the price of Fed funds futures now imply that investors see no chance of a half-point cut and an almost 20% likelihood of no cut at all. The reassessment makes sense. Depending on how you measure inflation, real short-term interest rates are already around zero or negative. And although America's economy is still heading downhill, the Fed's calculus about the benefits and risks of even cheaper money is shifting fast.

First, the odds of financial disaster have receded. Although important parts of the credit plumbing, notably the interbank market, are still surprisingly gummed up (see article), spreads on riskier bonds have narrowed. Steep rate cuts were partly meant as a (blunt) tool to forestall financial calamity. More of that insurance now seems unnecessary. Second, America's economy is not deteriorating any faster than the central bankers had expected. According to the minutes of the Fed's last meeting, its staff and several governors believed output would contract in the first half of 2008. The latest statistics do not show an economy in freefall. Industrial production rebounded in March after plunging in February. The pace of existing home sales fell slightly in March, but was stable over the first quarter as a whole.

America's central bankers, too, are becoming more worried about inflation, Two members of the Fed's rate-cutting committee, Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed, who voted against a big rate cut at the last meeting on March 18th, were already worrying that inflationary expectations could become “unhinged”. Lately even some doves, such as Janet Yellen of the San Francisco Fed, have sounded concerned.

For the moment, America's price picture is murky. “Core” measures of inflation—which exclude food and fuel and which Fed officials tend to prefer—have improved of late, largely because rents are no longer rising as fast as before. And some market measures of inflationary expectations, such as the gap between inflation-indexed Treasury bonds and others, have fallen in recent weeks.

But headline inflation remains high—at 4% in the year to March. And price pressures are building at the wholesale level. Producer prices rose at an annual rate of 9% in the first quarter of the year, while prices of intermediate goods were up by 15%. If the dollar weakens further and commodity prices continue to soar, that pressure will rise. The central bankers' balance of risks is clearly shifting.

For the entire article from THE ECONOMIST click here:

Total existing home sales fell 2.0 percent in March to a seasonally-adjusted annualized rate of 4.93 million, as the drop in single-family home sales outweighed the increase in condo sales.  Single-family home sales fell 2.7 percent, completely reversing the increase in February.  Condo sales rose 3.6 percent, following a 3.7 percent increase in February and an 8.2 percent drop in January. 

Sales of single-family homes during the first quarter of this year were down 20.0 percent from those during the same period last year.  Condo sales have performed worse, with year-to-date condo sales 28.7 percent lower than those last year.  Since their peak in September 2005, single-family existing home sales have declined about 32 percent -- surpassing the peak-to-trough drop of about 30 percent seen in the 1990-91 recession.

Even with a drop in home sales for the month, sales’ performance improved considerably for the quarter as a whole.  The decline in the first quarter -- at 3.7 percent annualized rate -- moderated significantly from the drop of at least 25 percent in each of the previous three quarters. 

Existing home sales rose in two regions: 2.3 percent in the Northeast and 2.2 percent in the West.  Sales dropped 6.5 percent in the Midwest and 3.5 percent in the South.

New homes sales decreased 8.5 percent in March to a seasonally-adjusted annualized pace of 526,000 -- following a 5.3 percent drop in February (previously reported as a 1.8 percent drop).  The March pace is the slowest since September 1991. 

Sales of new homes during the first quarter of this year were down 33.6 percent from those during the same period last year.  Sales have declined about 62 percent since their peak in July 2005. 

On a regional basis, sales of new single-family homes fell in all four regions of the economy, with the Northeast posting a 19.4 percent drop, followed by 12.9 percent in the West, 12.5 percent in the Midwest, and 4.6 percent in the South. 

The number of homes available for sale dropped 1.1 percent to 468,000.  This is the 12^th consecutive month of decline to the lowest level since July 2005.  The steady decline in inventory reflects considerable cutbacks in single-family homebuilding. 

A small drop in inventory but a huge decline in sales pace pushed up the months’ supply or the inventory-sales ratio to 9.8 months in March -- the highest reading since September 1981. 

Another indicator of sluggish housing demand is a sharp increase of the length of time on the market.  The median number of months on the market picked up sharply this year, rising to 7.5 months in March -- the largest since February 1992.  The median number of months on the market averaged 5.7 months last year.

The median price for new homes fell 13.3 percent in March from a year ago -- the fourth year-over-year decline in the past five months and the largest decline since July 1970.

The Office of Federal Housing Enterprise Oversight (OFHEO) Purchase-only House Price Index (HPI) increased 0.6 percent in February from January -- the first monthly increase in eight months.  From a year ago, the purchase-only index fell 2.4 percent, slightly moderating from a year-over-year drop of 2.7 percent in January.  Since peaking in April 2007, the monthly purchase-only index has declined 3.1 percent. 

The OFHEO index portrays a more optimistic picture of home prices than other measures of home prices.  It is based on data from Fannie Mae and Freddie Mac.  Thus the index includes only conventional conforming loans, largely excluding high-priced homes, especially in areas of the country where home prices have weakened considerably over the past year.  The OFHEO data also include relatively fewer subprime loans and adjustable rate mortgage loans, which have performed relatively worse over the past year.

For the entire article from the MORTGAGE BANKERS ASSOCIATION click here:

Wall Street ended its second consecutive winning week with a moderate advance Friday, overcoming concerns about consumer confidence and inflation.

After slumping early in the session in response to weak consumer confidence and a rise in oil prices, investors seemed to turn their attention to broader signs, including the week’s generally satisfactory earnings reports, that suggested that government efforts to steady the economy were working. That shift in focus sent stocks up late in the day.

Although the Reuters/University of Michigan consumer sentiment index came in with its lowest reading since the early 1980s, Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., said companies’ first-quarter reports convinced investors that “over all, things aren’t all that bad.”

“I think a lot of people went into the weekend feeling they didn’t want to be on the short side,” Mr. Lydon said.

While consumer spending represents about 70 percent of the economy, a UBS equities strategist, David Bianco, said, “It’s the wrong thing to be looking at to gauge the prospects” for companies in the Standard & Poor’s 500-stock index.

“Business activity is strong in the U.S. and especially globally,” he said. “That’s far more important.”

The Dow closed the week with a gain of less than 1 percent and the S&P 500 index rose 2.1 percent for the week.

The Nasdaq, gained 1.4 percent for the week.

For the entire article from THE NEW YORK TIMES click here:

When the government puts out its estimate of first-quarter economic growth Wednesday, the news is likely to sound better than it feels.

Many economists said the nation's gross domestic product -- the total output of goods and services -- likely expanded slightly in the first three months of this year. But that growth, they said, partly reflects an unwanted buildup of goods amid flagging sales -- hardly a welcome sign. And a positive GDP number will provide little comfort to Americans grappling with the worst housing and credit crisis in decades, a deteriorating jobs market, and soaring food and energy prices.

"We consider what we're in to be a recession," said Drew Matus, an economist for Lehman Brothers Holdings Inc.

A common definition of recession is two consecutive quarters of negative GDP -- but that isn't reflected in most economists' forecasts. Instead, many expect the economy to bounce between anemic growth and outright decline, followed by a feeble recovery.

Mr. Matus predicts that inflation-adjusted GDP rose at a 0.6% seasonally adjusted annual rate in the first quarter, and will decline at a 1% pace this quarter, before increasing slightly in the second half.

The last recession, in 2001, had two quarters of negative GDP, but they weren't consecutive. The current slowdown may not even get that.

That doesn't mean the economy isn't in a recession. The National Bureau of Economic Research, the nonprofit group that is the official arbiter of recessions, defines a recession as a significant decline across the economy -- including in inflation-adjusted GDP, income, employment and retail sales -- that lasts more than a few months.

"The classic characteristics of a recession are intact," said Dave Rosenberg, chief economist at Merrill Lynch & Co. He said the meager rise in GDP during the last three months of 2007 -- 0.6% at an annualized rate -- didn't keep pace with average population growth. As a result, GDP per capita fell.

Joe LaVorgna, chief U.S. economist at Deutsche Bank AG, has similar concerns. "The average American responds to two things: the labor market and the cost of living," both of which are headed in the wrong direction. "We can play around with the definition of recession," he said, but "will it really matter?"

For the entire article from THE WALL STREET JOURNAL click here:

As the latest World Economic Outlook from the International Monetary Fund remarks, “the world economy has entered new and precarious territory”. What are perhaps most remarkable are the contrasts between booming commodity prices and credit-market collapses and between buoyant growth in emerging economies and incipient recession in the US. So where are we? How did we get here? And what should we be doing?

The WEO’s answer to the first question is that the US economy may shrink by 0.7 per cent between the fourth quarter of last year and the fourth quarter of 2008. This is a big shift from the 0.9 per cent increase over that period forecast in the January WEO Update. Moreover, growth is expected to be only 1.6 per cent over the following four quarters. Meanwhile, the eurozone’s growth is expected to fall to just 0.9 per cent between the fourth quarter of 2007 and the fourth quarter of 2008.

While the most important high-income countries stumble, the picture for the emerging economies is of modestly diminished growth: 7.5 per cent growth in emerging Asia this year, with China on 9.3 per cent and India on 7.9 per cent; 6.3 per cent in Africa; and 4.4 per cent in the western hemisphere.

In all, growth of the world economy is forecast to slow considerably, from 4.9 per cent last year to 3.7 per cent in 2008 (measured at purchasing power parity exchange rates). In terms of growth at market exchange rates the slowdown is more significant, down from 3.7 per cent in 2007 to 2.6 per cent. Even so, global growth would remain well above levels in 2001 and 2002 (see chart).

This, then, would be a case of “large earthquakes; not too many hurt”. Yet these forecasts coincide with two huge events: the financial crisis and the commodity price shock. The first is described by the WEO as “the largest financial shock since the Great Depression”. The second is the result either of a gathering inflationary storm or of reaching limits to the rate of growth (or, more plausibly, of both).

What has brought us to this point has at least five components: the accelerated growth of emerging economies, especially China; the emergence of a huge surplus of savings over investment in significant emerging economies, particularly China and the oil exporters; a long period of low inflation and relatively stable economic activity in high-income countries; financial liberalisation and innovation; and accommodative monetary policies.

Emerging economies have been the engines of growth over the past five years: China accounted for a quarter; Brazil, India and Russia for almost another quarter; and all emerging and developing countries together for about two-thirds (measured at PPP exchange rates) of world growth. Furthermore, notes the WEO, these economies “account for more than 90 per cent of the rise in consumption of oil products and metals and 80 per cent of the rise in consumption of grains since 2002” (with scandalously wasteful biofuels programmes contributing most of the remainder).

Emerging economies have also been huge exporters of capital. China’s current account surplus was 11.1 per cent of gross domestic product last year. Higher prices of petroleum have also shifted income to high-saving countries.

Finally and most fundamentally, will it be possible to retain a political consensus in high-income countries in favour of a liberalised and globally integrated economy? How do we persuade citizens that the rise of the emerging countries, the brightest story of our era, is to be welcomed, rather than resented or even resisted, when what they experience is financial disarray, falling house prices, recession and soaring costs of essential commodities?

For the entire article from the FINANCIAL TIMES click here:

From Pat Oliphant 

 

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