Economic Despair

Its getting real ugly in Sacramento. Median home values crashed 7.4 percent during the first quarter from a year ago. For all the gory details, check out that great blog Sacramento Landing.

GMAC - the financial services wing of General Motors - have just reported a huge drop in profits. Again, the subprime market is to blame.

"The slump in the US property market has hit General Motors hard, with first-quarter profits dropping 90 per cent as losses at its mortgage lending business offset improved sales of cars.

Profits of $62 million (£31 million) at the world's second-largest carmaker for the first three months of the year were sharply down from $602 million in the same period a year earlier.

The company attributed the decline to a $305 million loss by GMAC Financial Services, compared with a profit of $495 million a year earlier. The main factor behind the deficit was the fallout from a collapse in the US sub-prime mortgage market.

GM sold a 51 per cent stake in GMAC to private equity investors last year, but still owns 49 per cent of the business. The group said in a statement: “The decline in reported GM earnings is more than accounted for by losses in the residential mortgage business of GMAC Financial Services (GMAC), driven by continued weakness in the US non-prime mortgage sector.”

Here are two ads that illustrate all that is wrong with today's housing industry. The first is a vile and offensive realtor ad from Colorado.



I think we can all agree that getting a young woman to take off her top doesn't say much for the sales ability of a realtor. Hat tip to real estate video for finding this piece of crap.

The second ad comes from Lou Minatti. This radio add pushes one of those real estate investment seminars. "Turn $500 of investment income into $3,000 of cashflow". It is a deeply misleading advert, largely aimed at the Casey Serin wannabees.

Bernanke might be talking tough on interest rates, but many investment analysists are far fron convinced. Many believe that the collapsing housing market will bring the economy down with it, pushing the US into recession by the end of the year and reducing inflationary pressure. Rather than raising interest rates, the Fed will be beginning a new cyle of monetary policy easing.

Notwithstanding what the investment bankers might be saying, inflationary pressures remain strong. In February, the Fed's preferred measure of inflation - the price index for consumer spending on items excluding food and energy - rose 0.3 percent. The price gauge rose 2.3 percent from a year earlier; significantly above the Fed's comfort level of 1 percent to 2 percent.

April 30 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying.

While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year.

The conflict boils down to opposing views about real estate. Central bank governors found no evidence that the housing market had affected the broader economy, according to notes of their March policy meeting, released April 11. The National Association of Realtors said last week existing home sales fell 8.4 percent in March, the steepest drop since 1989.

Bernanke is missing "the linkage between residential housing investment and the broader economy," Jan Hatzius, chief U.S. economist at New York-based Goldman, the world's most profitable securities firm, said in an interview. "The housing downturn is of the first order of importance." Hatzius says the Fed will cut rates three times this year, to 4.5 percent from 5.25 percent.


The Zimbabwean despot – Robert Mugabe – is on the verge of scoring a major diplomatic coup. Zimbabwe looks certain to become chair of the United Nation’s Commission on Sustainable Development. So what exactly qualifies Mugabe to take the leadership of this UN body?

Mugabe’s record on sustainable economic development is unique. Few dictators have destroyed a country’s economy more quickly or more completely. Between 2000 and 2007, the national economy contracted by as much as 40 percent. Zimbabwe has the highest inflation rate in the world; prices are increasing at over 2,200 percent a year. Zimbabwe suffers from persistent shortages of foreign exchange, fuel, and food. Under Mugabe’s mis-rule, Zimbabwe has become the second most heavily indebted country in the world.

Despite his socialist rhetoric, Mugabe has created one of the most unequal societies in the world. The lowest 10 percent of Zimbabwe's population consume only 2 percent of income while the highest 10 percent consume 41 percent. Both unemployment and poverty rates are running at nearly 80 percent of the population.

Mugabe turned Zimbabwe from being the breadbasket of southern Africa to an importer of food. His chaotic land redistribution campaign, which began in 2000, caused an mass exodus of white farmers. As he handed land over to his cronies, the economy collapsed, and ushered in widespread shortages of basic commodities, and pushed the population to the edge of famine.

His human rights record is appalling. In April 2005, his corrupt administration began “Operation Restore Order”. Using the pretext of an an urban rationalization program, his thugs destroyed the homes or businesses of 700,000 mostly poor supporters of the opposition,

Mugabe will use the leadership of the UN sustainable development committee as a platform to attack the developed world. He will peddle his usual conspiracy theories where Zimbabwe is presented as the victim of hostile western government. In the process, he will further discredit the UN and its institutions. However, the UN can hardly complain. If it is prepared to accept countries like Zimbabwe in leadership roles of the key UN institutions, ridicule and comtempt is inevitable.

San Francisco home sellers think that the housing crash has reached the bottom. After falling sharply during the latter half of last year, median asking prices have stabilised. Since December, sellers have refused to cut prices. However, inventory isn't playing fair. As soon as asking prices stabiised, inventory began to rise.

Only a further round of heavy price discounts will reduce inventory. The San Francisco housing crash continues.....

Data provided by the housingtracker website.


Can we have just one day without some bad news from the America's housing sector. Of course not.

Today, we have the index of pending sales of existing homes. In March, the index fell to its lowest level in four years in March. According to the NAR, the index of signed purchase agreements, or pending home resales, fell 4.9 percent to 104.3, the lowest since March 2003.

The crash continues......

It an old trick played by all dictators - demonize the foreigner. Today, Chavez - the cracker from Caracas - effectively stole a large chunk of the country's oil sector, under the pretext of protecting Venezuela's national assets.

U.S. companies ConocoPhillips, Chevron, Exxon Mobil, Britain's BP, Norway's Statoil and France's Total woke up today to find that their assets had been expropriated. After years of careful private sector development of the oil industry, which benefited both Venezuela and investors alike, Chavez comes along with that well-worn old song about "Homeland, Socialism or Death." What a sad choice to put before the nation. Would not "protection of property rights, democracy, and peace" be a better maxim?

With the benefit of high oil prices, Chavez can afford to offend foreign investors. However, once investors are expropriated, it is hard to convince them to return. Venezuela is a one industry country. It has a long and miserable history of boom following bust as oil prices rise and fall. Without foreign investment, the country's dependence on oil will increase. In the long run, Venezuela's development is jeopardized for the sake of crude quasi-racist anti-Americanism.

Foreign investors brought development, international best practice and technology transfer to Venezuela. Certainly, Venezuela has a sorry record of neglecting the poor. However, that was the responsibility of successive Venezuelan governments, who found it convenient to export responsibility for their failure overseas. Of course, it is always easier to blame Uncle Sam rather than undertake sustainable political and economic reform.

Venezuela's state oil company PDVSA has a well-earned reputation for corruption and mismanagement. Now, the PDVSA's management has even more assets to mismanage. Give PDVSA a little time and it is certain to screw things up. As the current management pulls out, these companies will run into production and safety problems.

Chavez now intends to nationalize the utilities and telecommunications. In the fullness of time, he will propose economic centralization and 5 year plans. Once oil prices fall, financial difficulties will follow. Venezuelans will see Chavez for what he is - a political fraud. One day, he will be racing to the airport, fleeing into exile. It is what usually happens to South American dictators.


How should we prepare for retirement? Should we save using mutual funds or play the lottery? If you answered "mutual funds" Rich Dad Robert Kiyosaki asks you to think again. In this article, he uses the dubious logic that since both mutual funds and lotteries are "uncontrolled" gambles, there isn't much to choose between the two. How about expected returns Robert? Most of us seem to find a 5 percent return on their honestly earned wealth a more attractive investment proposition to a one in a gazillion chance of being a multi-millionaire.

Personally, I always thought that Kiyosaki had nothing useful to say. Happily I haven't bought one of his books, though I did quickly skim-read one while having a coffee at Barnes and Noble. His investment approach could best be summarized as contempt for his loving father plus a belief in real estate. He also used that real estate victim- Casey Serin - cynically as a self promotion vehicle. It was unforgivable but unsurprising.

Read the article, laugh and seek out the weak investment disclaimer.

The story of David Lereah, the NAR's former chief economist, reflects the highs and lows of the US housing bubble. Back in 2004, he was the chief cheerleader for the NAR, talking up housing, and promising everyone the future of eternal price appreciation. His books were bestsellers and as a speaker he was in constant demand.

Like house prices, his economic forecasting gradually departed from fundamentals. However, house prices were the first to begin a correction. As a bubble began to burst, Lereah's forecasts became increasingly absurd. He called the bottom no fewer than four times. As each month produced more and more depressing data on the housing market, his optimism was irrepressible. Each NAR press release protested that the current slowdown was only temporary and that things will improve shortly. However, his credibility began to diminish and this reflected upon his employer, who weren't prepared to look foolish for his sake.

It looks like David Lereah blamed the housing crash on the weather just once too often. The NAR leadership realised that he had to go. While the precise details of his departure are a matter speculation, it is not hard to imagine a gentle conversation where David is asked politely to leave in a media friendly manner.

In some respects, Lereah's departure marks an unprecedented degree of public accountability. In the past, Lereah could safely make his absurd comments without any fear of losing his job. Today however we have the housing bubble bloggers, who unlike the mainstream media, are prepared to question self-interested commentary from pressure groups like the NAR. Lereah and the NAR were held to account for what they said, and where they were found wanting, the bloggers demanded the truth. Ultimately, the bloggers made Lereah a liability for the NAR that his why Lereah was pushed out.

In this regard, three bloggers deserve particular mention; housing panic, the bubblemeter and David Lereah watch. Today is a victory for them and the truth.