Household debt payments continue to decline

- by New Deal democrat

Two of my favorite topical statistics were released Monday by the Federal Reserve Bank. They are the Household Debt Service Ratio and the Financial Obligations Ratio. Together, these data series show that households continue to trim their debt payments as of the most recent reporting period. Their only failing is that they are released quarterly, and three months after the end of the quarter, so that the data released yesterday covers the period from April to June this year.

Here is how the Federal Reserve defines each statistic, and where they stand as of midyear:

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

This ratio has been declining by .25% a quarter for over a year, and continued declined again by .28% during the April - June quarter. There is every reason to believe that this ratio now is already about 11.88%.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

This ratio has been declining by .30% per quarter for over a year, and as of last quarter was 17.02%. There is also every reason to believe that the ratio has declined by about another .30% this quarter to 16.68%, but we won't find that out until the end of the year.

Household debt burdens on average have already declined to the point where they are in less than what they have been in all but about 10 of the last 30 years. At the current rate of decline, household debt burdens will be at an all time low for the series by the end of next year.

This data does not conflict with the recent hubbub in the blogosphere that households have not deleveraged in terms of the total amount of debt owed, as shown in this graph, also from the Federal Reserve, in its most recent flow of funds report:


Taken together, what the above three graphs show is that the total amount of outstanding household debt has not declined that much, but the rate of household income devoted to payment of that debt continues to decline.

The reason for this is shown most graphically in the mortgage bankers association's refinance index. Here is where it stood a couple of weeks ago:

Notice that as mortgage payments approached 4%, a flurry of refinancing occurred both last year and again recently.

In other words, if I refinance a $200,000 mortgage from 6% to 4%, the total amount of my debt hasn't gone down, but the amount I have to pay monthly on that debt has gone down dramatically.

In addition to mortgage refinancing, some deleveraging is being done involuntarily by way of mortgage foreclosures and also by cutbacks in credit card availability.

Also, while the purchases of new cars continue at a 25% reduction from the 16 million annual rate of a few years ago, according to Edmunds.com

said that used car prices nationwide have increased 10 percent from 2009. The report estimated that the average price for a used three-year-old vehicle in July was $19,248, up about $1,800, or 10.3 percent, from July 2009.

Contrarily,

as of 2010 the average cost of a new car in the United States is somewhere around $28,400.

Thus, as an increasing number of people finance used rather than new cars, or elect to keep driving their car after the time when their car loan is paid off, auto loan debt is declining.

This is of a piece with the increase in the rate of personal savings:

Refinancing and the decline in household debt service obligations show how we have been able to have a modest increase in consumer spending by way of real retail sales and real personal consumption expenditure increases, while still increasing personal savings.

Yesterday's Market

Yesterday, prices really didn't move much at after the open (b). However, in mid-morning they fell to lows from Friday (c and g), then attempted to rally past resistance and failed (d and a). Prices then fell to the 20 minute EMA (e) and then fell off further into the close on high volume (f).



The IWCS -- the microcap index--are just above key resistance levels. Also note the EMA picture is improving with all of the shorter EMAs (10, 20 and 50 day) rising. However, the EMAs have been floating around the 200 day EMA for some the last month or so, so this is not as important a technical development, yet Take a close look at the A/D and CMF lines -- notice neither dipped lower during the sell-off. This indicates a lot of money did not leave the market; instead, more or less the same same number of traders were involved. Finally, note the MACD is rising, indicating momentum is strong.


The Transports are also right at key resistance levels (a). However -- and like the IWCS -- the A/D line and CMF indicate the recent sell-off did not cause a bid exodus from the market; instead, traders bode their time. Also note the MACD is rising.


In contrast we have the Treasury market, which opened with a gap higher (a) and them moved into a rally throughout the morning (b). Along the way prices consolidated in downward sloping pennant patterns (c). Prices spent most of the rest of the day consolidating in sideways movement (d), but did rally above resistance right at the close on increasing volume.

Oil dropped right at the open (A), rallied into the 50 minute EMA (B) and then fell again, forming a double bottom (C). Prices then rallied again (D), sold off and rallied again (E), eventually closing lower.


Gold is in a strong, upward sloping trend bound by lines A and B. The EMA picture is incredibly strong with all moving higher and the shorter above the longer (C). Also note that momentum is positive (D).

Where is the S&P 500 ?

I belong to Stocktwits which has some really good traders posting. Here is a chart of the S&P 500 that I hadn't caught:

A Closer Look at Wheat

Sometime over the last few years I read a series of market analysis books that dealt with inter-market analysis and cyclical analysis. These books look at markets from a relationship perspective. For example, because most commodities are priced in dollars, the dollar and commodities usually have an inverse relationship: when the dollar rises commodities priced in dollars fall. Another example is the recent inter-relationship between the stock and bond markets; as the bond market has rallied it has taken money from the stock market.

Inter-market analysis stresses the importance of four markets: equities, capital markets (the bond markets) futures (commodities) and currencies. This week, I'm going to take an in-depth look at some of the commodity markets, providing some basic information on the big commodities.

From the USDA:

The United States is a major wheat-producing country, with output typically exceeded only by China, the European Union, and India. During the 2000s, wheat ranked third among U.S. field crops in both planted acreage and gross farm receipts, behind corn and soybeans.

.....

The five major classes of U.S. wheat are hard red winter, hard red spring, soft red winter, white, and durum. Each class has a somewhat different end use and production tends to be region-specific.

• Hard red winter (HRW) wheat accounts for about 40 percent of total production and is grown primarily in the Great Plains (Texas north through Montana). HRW is principally used to make bread flour.

• Hard red spring (HRS) wheat accounts for about 25 percent of production and is grown primarily in the Northern Plains (North Dakota, Montana, Minnesota, and South Dakota). HRS wheat is valued for high protein levels, which make it suitable for specialty breads and blending with lower protein wheat.

• Soft red winter (SRW) wheat, accounting for 15-20 percent of total production, is grown primarily in States along the Mississippi River and in the Eastern States. Flour produced from milling SRW is used in the United States for cakes, cookies, and crackers.

• White wheat, accounting for 10-15 percent of total production, is grown in Washington, Oregon, Idaho, Michigan, and New York, and its flour is used for noodle products, crackers, cereals, and white-crusted breads.

• Durum wheat, accounting for 3-5 percent of total production, is grown primarily in North Dakota and Montana and is used in the production of pasta.

.....

Wheat area has dropped from its early 1980s highs, due mostly to declining returns relative to other crops and alternative options under government programs. Authorization of the Conservation Reserve Program (CRP) in the 1985 Farm Act, followed by planting flexibility provisions in the 1990 Farm Act, provided wheat farmers with other options for use of their acreage. Under the 1990 Act, farmers participating in commodity programs could plant up to 25 percent of their base wheat acreage to crops other than wheat without losing base acreage. Farmers thus had an incentive to grow crops promising higher returns or to earn rental payments from idling land under the CRP.

Let's take a look at some charts regrading wheat exporters and importers:



The US' percentage of world exports has been pretty consistent over the last 20 years.



The US has consistently been one of the largest wheat exporters.



Total wheat imports have been increasing for the last 30 years, led by


Increased demand from North Africa and the Middle East

Let's take a look at wheat prices from several perspectives, starting with the long-term and moving to the short-term.

For the first part of the decade, wheat prices were confined to a fairly narrow trading range (A). However, prices spiked in a big way in 2008, but have fallen a bit from those levels (B). Currently, prices are rising again, largely on news from Russia.



Section (A) highlights the 2008 price spike clearly. Prices have consolidated by forming a strong basing pattern (B) for about a year and a half.


The daily chart shows the Russian price spike (A) and the recent consolidation from high levels (B). Notice that despite decreased momentum (C), prices are moving sideways and are above the 50 day EMA. This tells us that traders aren't selling their positions outright, but are taking some profits off the table and are waiting to see what happens.

The Folly Of Ratings Agencies

From the NY Times:

As the mortgage market grew frothy in 2006 — leading to a housing bubble that nearly brought down the banking system two years later — ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission.

.....

The commission, a bipartisan Congressional panel, has been holding hearings on the origins of the financial crisis. D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors.

Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.

Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service.

“We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” Mr. Johnson testified last week. But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street.

“If any one of them would have adopted it,” he testified, “they would have lost market share.”

The financial crisis has pretty much proved the ratings agencies are useless when it comes to, well, rating securities. While some provide other, valuable services (such as the S and P 500), the whole "single A" or whatever rating on anything is worth nothing.

American Housing Survey

The Census Bureau releases the American Housing Survey every two years. This particular survey is important in that it encompasses the drop in real estate prices....

Here are some interesting facts....

There are 76.428 million owner occupied units...50.300 million have a mortgage...24.206 million own their home free and clear.....10.962 million have a mortgage of under $50,000....

so 46% of home owners own their home outright or have a mortgage of less than $50,000...

24.066 million had a mortgage of 6% or more in 2009( I am sure this is much less with all

the refinancings in 2010)....5.804 million have a mortgage and are over 65 ( the median mortgage for this group is $55,911 and the loan to value is 35%)

Here is the link....


http://www.census.gov/hhes/www/housing/ahs/ahs09/ahs09.html

Yesterday's Market

The SPYs have moved through important areas of resistance (a).


The QQQQs are above important areas of resistance (a).


The DIAs are above resistance (a).


The IWMs are just below important areas of resistance (a).


The IWCs have moved through important resistance.


The IYTs are just below important areas of resistance.

Anyone notice a pattern to the above observations? Equities are advancing; and it's not just one average. All are either through resistance or just below. This is a very bullish development as it indicates that across a wide range of investors classes (conservative, large cap buyers, technology and small cap investors), we're seeing interest in equities.

In addition, consider these charts of the long-end of the Treasury Market:


The IEFs broke through support, rallied to support and then moved lower again. In addition,



The long-end of the Treasury market is right below technical support.

In other words, prices in the Treasury market -- which has pulled support from the equity markets -- are moving lower at the same time we're seeing money move into equities.


The dollar has been dropping for about a month. After hitting point (b), it has formed upward sloping consolidation patterns (c, d, and e). Last week it tumbled after the Fed announced it wouldn't be rising rates anytime soon. With a falling dollar, remember that commodities will have an upward bias.


Above is a chart of lumber, which was in a strong basing pattern (A) for a few months. Now prices have started to move higher, with the initial break occurring at (B) and a continuing at (C). Lumber is obviously a key component of the housing market, so we could be seeing come initial buying in anticipation of a housing rebound.

A Closer Look At Corn

From the USDA:

The major feed grains are corn, sorghum, barley, and oats. Corn is the primary feed grain in the United States, accounting for more than 90 percent of total feed grain production and use.

.....

Corn acreage in the United States has increased from a government-mandated low of 60.2 million planted acres in 1983 due to provisions in the Federal Agriculture Improvement and Reform Act of 1996. The Act permitted farmers to make their own crop planting decisions based on the most profitable crop for a given year. While the number of feed grain farms (those that produce corn, sorghum, barley, and/or oats) in the United States has declined in recent years, the acreage per corn farm has risen. Moreover, the number of large corn farms (those with more than 500 acres) has increased over time, while the number of small corn farms (those with less than 500 acres) has fallen.

.....

Corn production has risen over time, as higher yields followed improvements in technology (seed varieties, fertilizers, pesticides, and machinery) and in production practices (reduced tillage, irrigation, crop rotations, and pest management systems).

.....

Strong demand for ethanol production has resulted in higher corn prices and has provided incentives to increase corn acreage. In many cases, farmers have increased corn acreage by adjusting crop rotations between corn and soybeans, which has caused soybean plantings to decrease. Other sources of land for increased corn plantings include cropland used as pasture, reduced fallow, acreage returning to production from expiring Conservation Reserve Program contracts, and shifts from other crops, such as cotton.

In other words, corn is a raw material that is processed in various ways into other goods which are then sold in some form.

Let's take a look at some data:



Corn is obviously the dominant component in feed grains.



Notice the continued increased in yield, indicating farming is becoming much more efficient.



Also note that demand and supply continue to increase.




Ethanol use is clearly one of the primary drivers for increased corn use over the last few years.

Corn is very important to agricultural exports:

The United States is the world's largest producer and exporter of corn. Corn grain exports represent a significant source of demand for U.S. producers and make the largest net contribution to the U.S. agricultural trade balance of all the agricultural commodities, indicating the importance of corn exports to the U.S. economy. On average, corn grain (excluding popcorn or sweet corn) accounted for approximately 11 percent of all U.S. agricultural exports by value during the 1990s. In 2008, due to record exports of corn and other feed grains, that share grew to over 12 percent of the U.S agricultural export value.

Here are the relevant charts regarding exports and imports:


The US is obviously the largest corn exporter by far




Notice the developing countries have continually increased their corn imports for the last 20 years. The Middle East is also a strong source of growing demand.


Let's take a look at the charts:


For the first part of the decade, corn prices were fairly subdued with the exception of an early 2004 price spike (A). Like all commodities, corn rallied in a big way in 2008, but fell with the recession (B). It consolidated in a triangle pattern (C), but has since rallied (D) in concert with wheat.


The weekly chart shows the 2008 spike (A) along with the triangle price consolidation (B) and the recent rally (C).


Prices have been in a strong uptrend since the beginning of June with two uptrends (A and B) ini place. Prices have consolidated gains during the rally in a standard downward sloping pennant pattern (C). Prices have recently topped (D) and printed three strong downward sloping bars this week. The EMA picture is still bullish (E), but the MACD has given a sell-signal (F).

Join Us in Washington With Jon Stewart

From CNN:

Are you tired of the extremes dominating the debate? Angry about hyperpartisans hijacking American politics? Well, Jon Stewart has a rally for you and me.

The Rally to Restore Sanity is slated for October 30, the weekend before Election Day, on the Washington Mall.

I'll be there. Hopefully, you'll be there to. Food for thought.

Weekly Indicators: What is vs. what should be Edition

- by New Deal democrat

As Bonddad said a week ago, we try to keep this blog as apolitical as possible and focus on economics. As you can guess from my nom de blog, my politics are very populist. If it were up to me, there would have been a new New Deal in the last two years, with a new WPA, the reinstatement of Glass-Steagal in full, the full regulation of commodity indexes, cracking down on leverage and the banning of synthetic derivatives, a VAT to combat the trade deficit with proceeds rebated to all citizens, and steeply progressive increases in income and estate taxation especially over $1 million in income or $10 million in estates. Plus a countercyclical mandate for surpluses during economic expansions to fund deficits during recessions. But that is simply beyond the pale for the Versailles political establishment, and writing long manifestos bewailing that situation strikes me as no more than narcissistic intellectual autoeroticism.

So I stick to what is, not what I think should be. What is, is that the recession bottomed 15 months ago, as determined by the NBER. The economy is expanding, although in a way that has only returned something like 10% of the jobs lost in the recession, and making very little progress in income for most Americans.

What also is, is that housing sales appear to have bottomed, although there is precious little bounce back. Leading Indicators for August came in positive, lessening the likelihood of any "double dip" this year (and so far September's look like they may be even better).

High frequency weekly indicators are continuing to suggest that the possibility of a double-dippette is decreasing.

The Mortgage Bankers' Association reported that its Refinance Index decreased 0.9% from the previous week, as slightly higher mortgage rates continued to dissuade applications, while the seasonally adjusted Purchase Index decreased 3.3% from one week before. Purchase mortgage activity remains significantly above its July lows for the third week in a row, however, it is still almost 40% lower than it was one year ago..

The ICSC reported same store sales for the week ending September 19 decreased 1.4% week over week, and up 3.3% YoY, returning to its stronger YoY performance from the last several months. Shoppertrak also reported that for the week ending September 18, YoY sales rose 3.3% percent from a year ago. The consumer remains alive and kicking.

Gas prices remained steady at $2.72 a gallon, and at 8.847 million usage again was virtually identical to one year ago. Gasoline stocks continue to be in or near record territory, strongly indicating some amount of hoarding of supply.

The BLS reported 465,000 new jobless claims, the first increase in three weeks. The four week average declined to 463,000. The question becomes whether this metric can resume its advance from last year's levels, or whether it will again be mired in this range.

Railfax showed rail traffic generally improving slightly last week. Economically sensitive waste and scrap metal continued to run below last year's levels, and autos loads are going sideways.

The American Staffing Association reported that for the week ending September 5, temporary and contract employment increased slightly, but remained rounded at 96.0, indicating this month some slackening in its growth.

M1 decreased -0.70.5% in the last week, but increased about 1.5% month over month, and up 6.0% YoY, so “real M1” is up 4.8%. M2 increased very slightly in the last week, +0.5% month over month, and up 2.7% YoY, so “real M2” is up 1.5%. Real M1 still strongly indicates no double-dip recession, and real M2 has been generally improving in the last few months, but is still under 2.5% YoY which would get us into the green zone.

Weekly BAA commercial bond rates rose for the third week in a row, up another .06% to 5.73%. This is still a very low rate and is rising in tandem with other bond rates.

Fifteen days into September, the Daily Treasury Statement is up $104.5 B vs. $95.3 B a year ago, a gain of ~9.7%. For the last 20 reporting days, withholding taxes are up $129.1 B vs. $119.1 B a year ago, for a gain of ~8.3%. This remains a very good showing compared with the last few months.

Weekly indicators generally are suggesting slow growth but no double-dip. A decrease in the price of Oil, or a modest increase in new housing starts would be welcome, but don't look like they are in the cards in the immediate future.

Is A Trade War Brewing With China?

From the NY Times:

President Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China’s prime minister to the issue and sending the message, according to one of his top aides, that if “the Chinese don’t take actions, we have other means of protecting U.S. interests.”

But Prime Minister Wen Jiabao barely budged beyond his familiar talking points about gradual “reform” of China’s currency policy, leaving it unclear whether Mr. Obama’s message would change Beijing’s economic or political calculus.

....

Democrats in Congress are threatening to pass legislation before the midterm elections that would slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.

Mr. Obama’s aides said he was embracing the threat of tariffs and new trade actions against China at the World Trade Organization to gain some leverage over the Chinese, but was also trying to head off any action that would lead to a destructive trade war.

.....

While the United States has been pressing China for years to lift the strict controls on its currency, which keep Chinese exports competitive and more factory workers employed, American voters and lawmakers have only recently seized on exchange rates as a potent political issue. Mr. Obama pressed much harder on Thursday than during a visit to Beijing last year, perhaps because a Chinese commitment several months ago to allow the value of the currency to rise has resulted in a change of less than 2 percent.

This is getting interesting.

Leading Indicators Increase

From the Conference Board:

Says Ken Goldstein, economist at The Conference Board: “While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concern that the economic recovery could fade and the U.S. could slide back into recession. However, latest data from the U.S. LEI suggest little change in economic conditions over the next few months. Expect more of the same – a weak economy with little forward momentum through 2010 and early 2011.”

Says Ataman Ozyildirim, economist at The Conference Board: “The U.S. LEI, which began rising three months before the end of the recession, remains on a general upward trend. However, the pace has been slowing. Correspondingly, current economic conditions, as measured by The Conference Board CEI, have been essentially flat since May, after reaching a bottom in June 2009. Taken together, the composite indexes are consistent with a slowly expanding economy in the near term.”

Here's a chart of the data:

Note that while the LEIs are still increasing, the rate of increase (raise your hand if you remember "rise over run") is decreasing. This is the reason the release includes a statement that the economy will be growing slowly. Also note the same situation applies to the coincidental indicators.

Click for a larger image.

7 of the 10 indicators were positive.

Above is a chart of coincident economic indicators. What is interesting in the lower chart is that we've only seen four negative contributions from the components in the last six months and three of those were from employment. This indicates the current conditions are at worst fair.

Yesterday's Market

The area in the rectangle clearly shows the markets trading range for the last few months


Yesterday, stock prices closed below two important technical support levels (a and b).


Yesterday prices gapped lower at the open and then rallied to levels established yesterday (g). volume decreased as prices moved higher (d) indicating a lack of enthusiasm as prices rose. Prices then moved lower until then hit support at (f) (yesterday's lows) , and then prices moved lower (c) on increasing volume (e).

The 7-10 year Treasury is right below important levels, while

The 20+ year Treasuries are above important levels.

Notice that as the Treasury prices rise the stock market looks less interesting. This has been a common theme for the last few months.


Cattle -- which was in a strong uptrend (A), has printed a double (B and C) top and broken the uptrend (D). Prices are now sitting at the 50 day EMA (E). Also note the MACD has given a sell signal (F).


The lumber market -- which had a consistent downtrend earlier this year (A) is still consolidating in a base (B). The market is obviously strongly influenced by the housing market.

No REALLY -- Austerity is A Really Terrible Idea That Doesn't Work

From the NY Times on June 28:

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

.....

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

From today's FT:

Ireland failed to emerge from recession after its economy contracted in the second quarter, putting further pressure on the country’s government to deal with its struggling banks.

The Central Statistics Office said on Thursday that gross domestic product fell by 1.2 per cent in the three months to the end of June. This compares with growth of 2.2 per cent in the first quarter.

I realize that data is anathema to political discourse now; ideology trumps all. But, in the wild hope that data (you know, facts and figures) actually matter to someone, the above facts do not bode well for austerity.

Is Nonresidential Construction stabilizing???

- by New Deal democrat

I'm sure it's too early to say that nonresidential construction has bottomed, but a few items make me believe it is time to start watching. Yesterday Bill McBride a/k/a Calculated Risk treated us to his monthly recap of architecture billings, with his usual note indicating that nonresidential construction would continue to decline for the foreseeable future. I'm not so sure.

Here is the same graph of AIA billings, but from Prof. Perry's Carpe Diem blog, with a line indicating how last month's reading compares with past readings:

Note that the most recent reading of the AIA is consistent with readings in early 2002 and early 2003.

Now let's turn to CR's most recent graph of residential (red) and nonresidential (blue) construction, through July:


Note that in early 2002 nonresidential construction was still declining, but in the second half of 2002 it stabilized and remained flat throughout 2003.

This makes me think that the AIA index may be similar to the ISM manufacturing index. Both are diffusion indexes, with 50 being the dividing point between most businesses reporting an increase vs. a decrease. But the ISM says that its index signals expansion before the index reaches 50. Several months' readings at 46 (the actual number may even be lower, I didn't go back and check), are sufficient to signal expansion. The 2002-03 readings of the AIA index suggest the same may be the case.

In support of that analysis, here is a graph of Commercial and Industrial loans from banks, updated through last week:



This series appears to have made a bottom in July. If it isn't the bottom, it at least is probably very close in time and value. At least some of those loans must be for new construction.

Finally, here is another graph of construction spending, from Briefing.com, showing YoY% changes. This shows the "second derivative" has turned up in the last few months, and its trajectory may be sharp - i.e., it may reach 0 in 6 - 9 months:


While it is probably too early to say that nonresidential construction has stabilized, it looks like it is time to watch for a bottom.

Is a Trade War Brewing Between the US and China?

From the FT:

Democratic leaders in the House of Representatives will move ahead with a bill allowing the US to retaliate against China for manipulating its currency, a significant escalation of the dispute between Washington and Beijing.

Sander Levin, chairman of the ways and means committee in the House of Representatives, said on Wednesday the bill would be compatible with World Trade Organisation rules.

But in a largely untested area of trade law the measure will evoke opposition from Beijing and could lead to a legal challenge in the WTO. The bill will go to committee on Friday and could be voted on by the full House as early as next week.

.....

Hours later, Wen Jiabao, the Chinese premier, told business leaders in New York that pressure on Beijing was unwarranted.

“The conditions for a major appreciation of the renminbi do not exist,” he said. If the renminbi were suddenly to rise by a large degree against the dollar, “we cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside... China would suffer major social upheaval”.

China unpegged the renminbi on June 19 and allowed it to appreciate after two years of holding it constant but has intervened in the currency markets to slow its rise.

First, let's start with the blatantly obvious: China manipulates the hell out of its currency.

Secondly, the US has not acted on this for reasons unknown. Personally, I think the US is scared to play a game of international relations chicken with the Chinese. However, I can't prove this; that statement is pure conjecture.

Third: China has grown as a direct result of its manipulation. China has developed a pool of investment funds as a result of purchasing currencies on the open market to prevent a run-up in the Yuan's value. As such, they have been able to go around the word and invest in all sorts of infrastructure projects in South America and Africa to develop and extract raw materials to export to China.

Fourth: China does not want to lose its funding source. However, it is probably near the point where the fund -- if prudently managed -- has become self-funding; that is, it is so large that the return on assets is in the multi-millions of dollars on an annual basis. In essence, it operates something like an endowment fund for a large collage or university.

Fifth: while the Chinese have said they would let their currency rise, this is a promise made before major world leader get-togethers to make it look like the Chinese are doing something, only to have the Chinese not act on their promise when the confab is over. In other words, their recent promises to act on the Yuan are public relations with no policy action.

How will this end? I have no idea.