UK Housing Slowdown: Escalated Nonsense
Mike Shedlock reacts to Treasury Secretary John Snow’s “warnings” to China threatening protectionist tariffs (specifically about an absurd threat to raise the tariffs on bras and underwear), and then discusses whether the UK Housing Slowdown means anything for the US market.
Escalated Nonsense
ON MAY 17, the U.S. Treasury Department issued yet another strong warning to China over its currency. A CNN/Money article on May 17 reports:
“China could be deemed a ‘manipulative trade partner’ if it doesn’t revaluate the yuan soon. ‘Current Chinese policies are highly distortionary and pose a risk to China’s economy, its trading partners and global economic growth,’ [the Treasury Department report] said. ‘It’s our view that the time has come’ for China to have more flexible exchange rates, U.S. Treasury Secretary John Snow said Tuesday.”
U.S. exporters claim the yuan is as much as 40% undervalued, making Chinese goods unfairly cheap.
On May 18, without even bothering to let the political dust settle, Snow escalated his China attack. Reuters reports:
“‘We are escalating the rhetoric and time is running out,’ Treasury Secretary Snow told questioners after a luncheon address to the American Iron and Steel Institute, where he indicated he was confident that China will loosen the peg it maintains on its currency.
“‘I fully expect in the next few months we are going to see that,’ Snow said, adding he hoped to help ward off mounting congressional calls for protectionist measures, which he said reflected a ‘decidedly anti-China’ feeling on Capitol Hill that was potentially dangerous.”
Snow went on to admonish China as “a major source of ‘knock-off’ items from fake Rolex watches to computer software” and called on them to “make a stronger effort to honor international trade commitments to open its markets and protect copyrights and patents.”
Would someone please shut this clown up before he does serious damage? Escalated rhetoric is just about the last thing we need. How can Snow possibly be helping matters by saying “time is running out,” and, with Congress, threatening 27.5% tariffs?
As far as I am concerned, our only beef with China is over copyright protection and patents. Then again, corporations know who they are dealing with. No one is forcing U.S. manufacturers to outsource to China. At any rate, copyright laws, which are a legitimate U.S. gripe, do not have anything to do with whether or not the renminbi should float.
If anyone finds my “clown” comment about Snow a little too harsh, then please consider the definition of “strong dollar” put forth by Mr. Snow himself. Investment Rarities reports:
“Snow said that his understanding of a strong dollar is the people should have confidence in it. ‘You want them to see the currency as a good medium of exchange, you want the currency to be a good store of value, something that people are willing to hold, you want it hard to counterfeit.'”
Let’s see. A strong dollar is one people have faith in because it is a good medium of exchange and hard to counterfeit. I suggest that economists the world over were laughing their heads off at the clownishness of that definition.
UK Housing Slowdown: Cheap Bras and Underwear
A few days earlier, on May 13, the U.S. government stated that U.S. consumers were paying too little for bras and underwear. Unfortunately, I am not joking. Here it is in black and white, or, if you prefer, in trousers and boxer shorts — The Washington Post reports:
“The Bush administration said…it will impose new caps on imports of clothing from China, responding to appeals from U.S. textile companies for protection from a rising tide of Chinese apparel that began to cross the Pacific after global trade rules were changed Jan. 1. The action, taken by a U.S. interagency panel, will limit the cotton trousers, underwear and cotton knit shirts and blouses that China can export to the United States this year.”
Look, do we or don’t we believe in free trade? To me, it looks like we don’t. In order to save, perhaps, 500 underwear-manufacturing jobs, or whatever the count might be, we want everyone in the United States to pay 27.5% more for their underwear. Is this a good deal? For whom? I suppose it makes sense for the 500 people making underwear, but for the rest of the 280 million people in the United States that wear underwear, I seriously doubt this looks like such a great deal.
Imagine what the U.S. inflation rate would be if all goods coming out of China were suddenly jacked up by 27.5%. Anyone care to calculate that?
Let’s look at the reality of the situation:
1. China is holding all the cards.
2. China knows it is holding all the cards.
3. The United States may or may not be smart enough to know that China is holding all the cards.
4. The United States will be a huge loser in a trade war with China.
5. Actually, the whole world will lose if the United States goes into a trade war with China, as it will cause a worldwide recession, or perhaps even a depression, should the United States elect to put 27.5% tariffs on Chinese goods. Worldwide trade will come to a screeching halt.
6. Given the United States’ short-term focus and China’s long-term focus, China cannot and will not be stampeded or bluffed into doing something that it does not want to do until it is damn good and ready.
As proof of points 2 and 6 above, I offer evidence from a May 18 Reuters article:
“China…dismissed U.S. criticism of its fixed currency peg and attacked European and U.S. steps to curb Chinese textile exports as unfair…
“But a senior official reaffirmed an assertion on Monday by Chinese Premier Wen Jiabao that China would not be bulldozed into acting.
“‘We agree with many of you that a more flexible regime would be better for China’s economy. But there is no time frame for such a change, as conditions are not ready yet,” Wei Benhua, deputy chief of China’s foreign exchange regulator, told a trade conference in Singapore.
“Wei said accusations that China was deliberately holding down the yuan were groundless and told the United States to ‘put its own house in order before blaming others’ for its trade deficit.
“Commerce Minister Bo [Xilai] also cried foul at moves by the United States and Europe to curb China’s textile exports…
“Bo said Washington and Brussels had had 10 years, until the end of 2004, to phase out quotas on developing countries’ textile imports.
“‘Regrettably, developed countries such as Europe and the United States failed to do so,’ he said. “They kept the vital part of 70-90% of quotas until the end of last year, which led to a temporary surge in Chinese textile exports early this year.'”
UK Housing Slowdown: Selective Enforcement
In a harsh attack against selective enforcement of rules by the United States and the European Union, Bo went on to say, “In international trade, we can’t have pragmatism: If the rule is favorable, you implement it; if it is not favorable, you don’t implement it. The current problem of textile trade is a typical case.”
Let’s step back from all this rhetoric and take a look at the facts. China fixed its currency, the renminbi, to the U.S. dollar in 1995. For nearly seven years, until January 2002, the Chinese currency went UP with the U.S. dollar. In this time frame, no one, including the United States, complained about the peg.
Since January 2002, the renminbi has been going down along with the U.S. dollar. Over the same period, the Chinese have become the biggest U.S. trading partner, and Chinese goods exports form a significant portion of the U.S. trade deficit.
China has held its peg through thick and thin and avoided at least one major Asian currency crisis. Does that sound like manipulation? If it sounds like manipulation to you, then please reply and tell me how.
Let’s recap. In the past month, we have officially accused China of manipulating the renminbi, threatened China with tariffs, reinstated textile quotas, and escalated the rhetoric one day later.
Originally, I thought that Congress could not possibly be stupid enough to risk passing another Smoot-Hawley-type protectionist bill, or if by chance they did, that the president would not sign it, but this escalated nonsense now has me wondering.
Then again, perhaps Congress has it correct. Underwear is just too cheap for our own good. We all have plenty of money to afford 27.5% higher prices, don’t we?
UK Housing Slowdown: Is UK Housing a Leading Indicator for the U.S.?
Is the housing slowdown in the United Kingdom a harbinger of what is about to happen in the United States? Let’s take a look at the current situation in the United Kingdom and see if we can find any parallels for the United States.
Citing official figures, the BBC reports that nearly 26,000 property repossession orders were granted in the first three months of 2005, the highest number since 1995:
“‘We are seeing lots of younger people coming to us for help,’ Frances Walker, spokeswoman for debt charity the Consumer Credit Counseling Service (CCCS) told BBC News.
“‘They are often very heavily in debt, as they have been able to borrow far more than in the past.
“‘The trouble is they have no assets, so when they get into difficulty they have nothing to fall back on.’
“As a result, Ms Walker said that CCCS’s counselors were advising more people to go bankrupt, many of them in their 20s and just out of university.”
In a May 4 CNN/Money article, Sarah Max notes:
“Between the fourth quarter of 2000 and 2004, U.K. home prices increased 88%, on average, according to the Halifax House Price Index…
“‘Buy to let’ became all the rage as investors shifted funds from their traditional portfolios into rental properties…
“Then, with little warning, the market cooled…
“According to the Council of Mortgage Lenders, lending to ‘buy-to-let’ investors dropped 18% between the first and second half of 2004…During that time, the number of investors unable to meet their mortgage payments increased 50%.
“‘People were buying thinking they would rent it out and make 15 or 20% appreciation, but now they’re left with only the rental yield,’ said [Ed] Stansfield at Capital Economics…”
“A year ago, everyone believed the supply of houses for sale simply could not keep up with demand. It was a seller’s market.
“‘The mortgage industry took great pleasure in the fact that the number of people in arrears was very low and possessions (foreclosures) were at an all-time low.’ [Stansfield] said.”
One year later, repossessions hit their highest total since 1995.
Jane Padgham writes in a May 20 Evening Standard article:
“Mortgage equity withdrawal slumped to less than 7 billion pounds in the fourth quarter of last year, the lowest for three years, according to Bank of England statistics…
“Mr. [John] Butler [chief U.K. economist at HSBC] said…’Less mortgage equity withdrawal means less finance available to households, so a slowing housing…market is enough to cause a turnaround in consumer spending…’
“Loan write-offs and revaluations by banks reached 6 billion pounds last year, the highest since records began in 1993, and the number of repossession orders has soared.”
The Bank of England trimmed its 2005 growth forecast to about 2.6%, from 2.7%, amid evidence that consumer spending, which has fueled 51 successive quarters of growth, is decelerating. On May 10, the British Retail Consortium said that April store sales had slumped the most in at least 10 years.
UK Housing Slowdown: In Denial
I am wondering what will happen to consumer spending when taxes pick up and housing prices decline further. It seems to me that Chancellor Gordon Brown is in denial over the state of affairs. Brown claims that the United Kingdom is on target with his self-imposed “golden rule” of borrowing only to invest. Others disagree. The Guardian writes:
“Jonathan Loynes, of Capital Economics, said: ‘With the economy unlikely to meet Mr. Brown’s forecast of 3% growth this year, we still expect taxes to have to rise after the election to put the public finances on a more sustainable footing’…
“And the shadow chief secretary to the Treasury, George Osborne, said all the figures proved was that the chancellor had got his figures wrong again.
“Mr. Osborne said, ‘These figures show the current budget deficit is half a billion pounds worse than the chancellor said it would be in the budget just one month ago.
“‘This is further backing from the government itself for what almost all the independent experts have been saying — that there is a shortfall in spending plans that they would have to fill with higher taxes.'”
Higher taxes would just about kill the housing market and consumer spending as well. Already, U.K. housing appears to be on the brink. Gabriel Rozenberg, in a Times article on May 17, writes, “The April report from the Royal Institution of Chartered Surveyors (RICS) found that 40% more surveyors experienced a fall than a rise in [house] prices.”
This is up from 39% in the previous month and not far from the 12-year high of 44% recorded last November. U.K. house prices have now dropped for eight consecutive months.
In an effort to keep the U.K. housing bubble alive, Chancellor Brown doubled the stamp duty threshold to 120,000 pounds. Is this an act of futile desperation? At some point, does it really make sense to keep encouraging people to spend money they do not have on overpriced assets they cannot afford?
The moves in the United Kingdom to keep the housing bubble alive seem similar to what is currently happening on this side of the ocean, as I reported in “Should the government sell bread, orange juice, or mortgages?”
President Bush is urging tax credits for homebuilders, and Housing and Urban Development Secretary Alphonso Jackson is “absolutely emphatic” about the U.S. government “winning back [its] share of the market that has slipped away to subprime lenders.”
Should this really be government’s role, here or there or anywhere, to promote a specific kind of consumption? Will it serve to lower prices to first-time buyers, or will it keep them elevated up until there is a housing crash?
A May 18 Bloomberg article reports:
“U.K. jobless claims rose for a third month in April and wage growth eased to the slowest in almost a year amid signs expansion in Europe’s second-largest economy is faltering.
“The number of people claiming unemployment benefit rose by 8,100, to 839,400, the Office for National Statistics said in London today…The central bank last week trimmed its economic forecast and said a slowdown in consumer spending has ‘become more marked,’ leading to speculation of a rate cut.”
In the meantime, Brown’s “golden rule” will be fighting an uphill battle with “U.K. manufacturing conditions getting worse,” according to the Confederation of British Industry (CBI). Forbes writes:
“A survey of small and medium-sized firms from the Confederation of British Industry found that trading conditions over the past quarter remain tough, with output, orders and employment all falling…
“The survey found that small firms reported the sharpest falls in numbers employed since October 2003, and although medium-sized firms reported broadly unchanged numbers, they expect to reduce employment over the next three months.”
Meanwhile, back in the States, we have a mixed bag. Home sales and housing starts are still quite strong (but in a disorderly up-down-up-down fashion). That is a sign of a topping market. On the other hand, higher interest rates and a weak economy seem to be taking their toll, as foreclosures jumped 57% from last year in some areas. JS Online writes, “The hardest hit states: Ohio, Texas, Michigan and Georgia, with more than 2,300 new foreclosures each.”
Manufacturing is clearly in trouble in the United Kingdom. Inquiring minds might be wondering about the United States. Let’s take a look:
“Manufacturing activity in the New York area deteriorated sharply for the second straight month in May, the New York Federal Reserve Bank said Monday. The bank’s Empire State Manufacturing index fell to minus 11.1 in May, from a revised 2.0 in April. This was the first negative, and lowest, reading since April 2003. Readings below zero indicate contraction.
“The drop was unexpected. Economists were forecasting the index to rebound to about 10.7 in May from the initial estimate in April of 3.1.”
Given that leading economic indicators have now gone negative for the first time since early 2003, that there is no war stimulus to look forward to, that business tax credits expired at the end of 2004, and that we have had eight consecutive rate hikes, I am inclined to think this is a sign of things to come as opposed to an outlier.
UK Housing Slowdown: US Likely to Follow a Similar Path
The cycle here in the United States will likely follow a similar path as to what is currently happening in the United Kingdom:
1. Stagnant housing prices.
2. Decreasing cash-out refis.
3. Decreasing demand for manufactured goods.
4. Decreasing manufacturing employment.
5. Decreasing demand for housing.
6. Housing speculation stops.
7. Housing prices falling.
8. Decreasing retail employment.
9. Decreasing demand for goods and services.
10. Recession.
My conclusion is that we are about 4-8 months behind the U.K. cycle, with a recession headed our way in 2006.
Regards,
Mike Shedlock, “Mish”
Contributing editor, Whiskey & Gunpowder
May 24, 2005
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