More Bad News for Housing

Good day… As expected, purchases of new homes in the United States dropped in May, and to add insult to injury, last month’s number was revised down. The housing slump, already the worst since 1991 continues to look like it will extend well into next year. The other data released yesterday showed that U.S. consumer confidence fell in May to the lowest level since August. More Americans say jobs are getting harder to find, the survey showed, while gasoline prices at near $3 per gallon have also led to a drop in confidence.

The reports released yesterday also show that home values in 20 U.S. metropolitan areas fell the most in at least six years, weakened by a record supply of properties for sale. Home values declined 2.1% in April from the same month a year earlier. Elevated inventories of unsold homes, reduced demand, and stricter loan requirements will keep prices low the rest of the year. It is a simple case of supply and demand. The supply of homes is growing, and the number of qualified buyers is shrinking. Housing will continue to be a drag on the U.S. economy.

We have been banging on the housing slowdown and the negative impact it will have on the economy for the past several months, but many of the FOMC members seem to want to continue to ignore this negative data. Unfortunately, most of the top talking heads at the Fed are looking at the U.S. economy through rose-colored glasses. The FOMC policy makers, who meet today and tomorrow, continue to hope that productivity – a gauge of employee efficiency – will rebound and rescue the economy. The Federal Reserve policy makers disagree with their own staff economists, and a growing chorus on Wall Street, who say the that U.S. economy can’t expand as fast as it used to without pushing up prices. The split, signaled in the minutes of May’s FOMC meeting, reflects the debate over whether a slowdown in U.S. productivity is permanent. At the last meeting on May ninth, after the staff presented a “slightly” lower estimate of future productivity, “many participants commented that their view of potential output growth was somewhat more optimistic than that of the staff,” according to the minutes of the session.

I can tell you that at EverBank we are pretty much hitting on all cylinders as far as worker productivity. It seems the FOMC members are looking for the magic bullet, which will reverse the U.S. economy’s slowdown without causing any inflation. An increase in productivity fits the bill; but they continue to ignore the impact a slower housing market will have. The results of this weeks meeting of the FOMC are all but assured, rates will stay right where they are. As has been the case over the past few meetings, the accompanying statement will get all the attention. It will be interesting to see just if the most recent data on housing has changed any of the Fed head’s minds, or if they will remain in their “own little world” and ignore the obvious risks the housing market holds for the U.S. economy.

The FOMC report will be due out tomorrow, along with the final GDP figures for the first quarter, personal consumption, and the weekly jobs data. Today we will see the durable goods orders, which are expected to have fallen in May for the first time in four months. This data should again put pressure on the U.S. dollar, which will continue its slide down.

While the United States seems to be teetering on the brink of recession, Europe continues on its steady growth path. German Finance Minister Peter Steinbrück said Europe’s economic growth is sustainable and inflation is stable in the 13 nations that share the euro (EUR). “This robust economic growth is obviously going to continue into 2008 and probably beyond,” Steinbrueck told the European Parliament today. “There seems to be a sustainable upswing, and no obstacles in the path of this.” The euro will continue to benefit from this stable growth and should move back to challenge $1.40 later this year.

Norway’s central bank is expected to raise its benchmark interest rate for the eleventh time in two years today, and say that the rate will peak at a higher level than previously forecast. The bank is expected to increase the deposit rate by a quarter point but more importantly will point to even higher rates later this year. The demand for oil has helped push unemployment in Norway, which is the world’s fifth-largest exporter of oil, to a European low of 1.7% in May. The economy is continuing to move at a good clip, and Norway’s central bank will aggressively raise rates to keep inflation at bay. This will certainly help keep the Norwegian krone (NOK) strong.

Our new WorldEnergy index CD, which combines the Norwegian krone with the Aussie dollar (AUD), British pound (GBP), and Canadian dollar (CAD) continues to be one of our most popular investments. With the Pound back around $2 and Norway, Aussie, and Canadian dollars appreciating on the rise of commodity prices, this CD is a perfect way to get some currency diversification into your portfolios.

The kiwi (NZD) has continued to rise in spite of the New Zealand Central bank’s attempt at currency intervention. As Chuck pointed out a few weeks ago, a central bank with reserves as small as New Zealand’s hardly has a chance at intervention. Even Japan, who has the largest reserves of anyone, has trouble fighting the markets. Now New Zealand’s central bankers are trying to jawbone the currency down by threatening additional selling of the currency. If they do decide to sell kiwi, it will just be a gift to those that buy it, as the currency markets will continue to keep the kiwi well bid as long as the interest rates remain among the highest in the industrialized world. The only thing, at this point, which would cause the kiwi to drop, would be a reversal of the carry trade. Until Japan gets aggressive on their interest rate increases, the carry trade will remain in play and the kiwi will remain strong.

Currencies today: A$ .8415, kiwi .7611, C$ .9338, euro 1.3445, sterling 1.9962, Swiss .8140, ISK 62.94, rand 7.2060, krone 5.9711, SEK 6.9042, forint 184.26, zloty 2.8306, koruna 21.32, yen 122.48, sing 1.5384, HKD 7.8161, INR 40.981, China 7.6185, pesos 10.8727, dollar index 82.29, Silver $12.24, and Gold… $641.60

That’s it for today… I received the following email from Chuck overnight, and wanted to share it with all of you:

“Good day… I will be going under the knife again this morning… I have to have a portion of my leg bone and my right hip removed and replaced. This will be even harder on my body than the kidney surgery… But… I’m strong… And I will beat this.

However, if in the course of the day you find that you have a minute… Please say a quick prayer for me… And my surgeon…”

Our prayers worked for him last time, so I would ask everyone to say another for him this morning. I hope everyone has a good hump day; and good luck to Chuck!!

Chuck Butler — June 27, 2007

The Daily Reckoning