Actual News Not in Davos

In solidarity with the Chinese government I have decided to forego my trip to the annual Davos shindig. I am willing to overlook the fact that, for the second year in a row, my invitation arrived late. Actually it didn’t arrive at all. But I refuse to attend during the Chinese New Year celebrations. How myopic can these folks get? They arranged an international economic forum slap bang in the middle of the new year. Well done. It’s not as if the Chinese are an important factor on the world economic stage or anything.

This gives me a little extra time to dwell on the news here at home.

The US real estate industry closed out an abysmal year with a thud. December’s new homes sales figures were dismal, coming in at 2.2% down from November and scraping along at an annual rate of 307,000 units. That’s a record low. Such is the depression in housing the the US is fast beginning to suffer from a shortage of new homes. Worse: what inventory we have is in all the wrong places, so there is local abundance where there is no demand, and local shortages where demand has survived. Way to go free market!

Overall sales of new homes fell 6.2% in 2011 to a record low of 302,000. Compare that with the peak reached in 2005 of 1,280,000. This is the worst year for sales since records began in 1963, and there doesn’t appear to be much sign of a break out.

December’s rotten record comes despite very favorable conditions: the weather was relatively warm in those parts to they country where winter can cramp sales; interest rates are low so mortgages are cheap; and prices are being heavily discounted as builders try to salvage something from the debris of the industry. None of these factors was sufficient to entice buyers, who remain in heavy retrenchment mode focused on debt reduction rather than new big ticket purchasing.Today’s report reinforced the gloom of yesterday’s news about pending home sales which were down 3.5% in December, which merely adds to the notion that there is no recovery in sight.

The only glimmer of hope – and it is only a glimmer – was the news that the FHFA index of home prices ticked up 1% in November. This index is created using the rates on government guaranteed mortgages only, so its is a relatively limited sample. Plus it is not a measure of the re-sale value of homes which is better captured by the Case-Shiller index. It really doesn’t matter though. Both indices say the same thing: home prices are down and seemingly are staying down. In the case of the FHFA home prices were down 1.8% for 2011 as a whole, and are off 18.8% from their peak in 2007. The Case-Shiller index is less up to date. The last data we have was released in late December and covers 2011 up to October, when prices were down roughly 3.0% for the year. The key point being made by the Case-Shiller index is that the recovery in prices we saw back in 2009/2010 has ben reversed somewhat, with the market softening throughout last year.

Meanwhile the Fed had made significant changes to the way in which it tells us what it’s doing. It has made public its medium term expectation for interest rates in an attempt to be more transparent about monetary policy. It also made public its inflation target.

The key news from the Fed is that it expects to hold short term rates at their current levels through until the end of 2014. That is not good news. It implies that the Fed doesn’t see robust growth during that period, or at least sufficient growth to force a tightening of monetary policy. The economy really does suck as much as we all feel it does.

One impact of the Fed’s announcement was to bring long term rates down. This was obviously part of the Fed’s intention. The markets now have a very clear idea of the rate structure over the next few years. This lessens risk and makes investment more straightforward. Today’s reaction in the credit markets saw rates on the five year Treasury bond down below 2%, with the two treasury rate slipping to 0.2%. At these levels we need a microscope to detect a slope in the yield curve. On a serious note: these kind of rates mean that a five year bond is almost as good as cash. This is uncharted territory, and bears close attention.

The other announcement the Fed made, about the target inflation rate being 2.0%, was a bit of a downer. That’s too low. As we try to spark a little life in our stagnant economy a couple of years of 5% inflation would help to hasten debt reduction and thus to free up cash for consumption. No such luck. Although with recent inflation being between 1.5% and 2.0%, we are clearly below the target and thus have no reason whatever for tightening. On the contrary: we are under-shooting the target. This is a reason to try to inject a little inflation. At the very least we look set for years more of very loose money.

One last thing: today’s report on new claims for unemployment assistance showed a retreat from last week’s improvement. There was a sharp climb back to 377,000, which was more than most analysts expected. The data has bounced around a bit lately because of the ebb and flow of seasonal jobs. The seasonal adjustments seem to have exaggerated the improvement last week and, perhaps, the worsening this week. The four week average has seen a slight steady gain, and it too has arrived at the 377,000 mark. The best we can say about the job market is that its tone has improved a bit from the beginning of 2011, but not significantly enough to be called a breakthrough.

We have a long slow slog ahead.

That is unless we get more enlightened economic policy. The odds of that are less than of me winning the lottery. Which makes the prospects for further stagnation a sure thing.

And that’s not good at all.