Question of The Day - What Ever Happened to Goldilocks?

Hmm…. Not so bullish now huh… Kudlow, Brian Wesbury, Don Luskin, Jerry Bowyer… Ben “Sub-Prime” Stein … Mark Perry … anything to say for your “soft landing” “no recession here” “Goldilocks Economy” drivel now?

Nah… I’m sure you wizards are too busy staring at the Intrade stats searching for the next bit of wisdom.

Anyone want to see clips of these guys from 2006 and 2007? … I have so many great moments captured… I think I’ll make a montage.

The Almost Daily 2¢ - A Better Path

Could there be anything more ironic than Larry Kudlow and his cadre of proud American “free” marketeers beaming with glee over yesterday’s GDP report which showed positive growth due in large part to a substantial increase in federal government spending?

I suppose under the current circumstances, big government consumption and the ultimate in “shock and awe” centrally planned manipulation of the markets of the “goldilocks” economy fit well with the Kudlow Creed.

Hypocrites.

For those looking for something a little more substantial I offer you a better path.

It’s called… (drum roll please)… “Reality”!

The truth is, the GDP report yesterday disclosed a number interesting data-points that, taken together with our working knowledge of the major issues at hand, provide clear evidence that the economy has hit the skids.

First, noting the obvious, Residential Fixed Investment is WAY down registering the ninth consecutive, and largest, negative quarter and the fifth (third consecutive) in which the decline erased over a full percent point from overall GDP.

Non-residential fixed investment declined substantially with both investments in structures and equipment and software simultaneously showing a notable drop-off, an unusual occurrence in an expanding economy.

Durable goods showed a rare and solid decline with the most notable weakness coming from motor vehicle, housing and furniture related spending.

Non-durable goods spending declined for food, fuel and other items and showed anemic growth for clothing and shoes while personal recreational services declined for the first time in at least three years.

Finally, aside from the strong contributions made by Federal government spending, there was a jump in private non-farm inventories that, although contributing .93% to overall GDP, may be signaling an unhealthy inventory build consistent with a recessionary environment of lower consumer spending.

Given what we know about the severity of the collapse of housing economy and its obvious effects on households and firms across America, should any of the above come as a surprise?

Would a recession really be a surprise? Even a severe recession?

So while Kudlow et al. continue to turn to the “predictions” rendered through the use of the internet gambling site Intrade for encouragement, why not stick to the fundamental trends that are so clearly taking shape and plan accordingly.

The Daily 2¢ - Jumbo Mortgage Avalanche

The times they are a changin’… and FAST TOO!

One week the Bulls are celebrating the “Goldilocks Economy” and DOW 14000 the next, a worried crisis-laden Larry Kudlow is stammering kookily about some crazy idea that the Federal Reserve should be buying up all the subprime and jumbo mortgages in order to prevent financial collapse… and in front of Robert Shiller no less!

Among the tumult surrounding Countrywide Financial and other mortgage lenders, yesterday’s business media was peppered with a slightly new and possibly more significant source of trouble for the nation’s housing markets, particularly for the hyper-inflated ultra-bubbly metro areas.

The availability of “Jumbo” mortgages, i.e. mortgages that exceeded the current OFHEO limit for Freddie Mac and Fannie Mae conforming loan status (currently $417,000 for a single family home), have essentially ground to a halt.

I say essentially because you can still get a Jumbo loan provided you give full documentation of your income (tax returns, pay stubs etc.), put down 20% on the purchase and are willing and able to finance the remaining principle at an over 7% interest rate.

Use Bankrate.com now and see for yourself… fixed rate, ARM, Interest Only… it doesn’t matter they are virtually all over 7% and almost non-existent if you’re not putting down 20%.

This is a kiss of death for the bubble-metro areas where home prices, even for the most modest starter homes, are still ridiculously inflated after having been pumped up by years of a loose lending induced buying mania.

The availability of cheap Jumbo’s is absolutely necessary for these areas to maintain any volume and fluidity of home sales, now they are gone and the first signs of the impact should be seen in the home sales statistics compiled during the next several months.

We have definitely reached another major turning point in the housing meltdown story as this will likely be the start of the most significant period of downward price adjustment in this cycle.

But wont things just snap back if the Fed cuts rates?

Not in my estimate.

To use an analogy, the mortgage meltdown is like an avalanche.

Friction exceeded its critical limit and the whole of the market has come crashing down the mountain.

Some lenders were instantly killed as pieces of debris crashed through their midsections; others are buried out of sight deep within the pile and, struggle as they might, will simply suffocate before they are able to resurface.

Still others are stuck in various ways but will go so far as to gnaw off arms and legs and stumble, bloody and hemorrhaging down to safety and a possible handicapped recovery.

A lucky few are simply trapped in shallow caves whereby, through a lot of digging, they will eventually free themselves, relatively unscathed but still bruised and shaken.

All the dead and survivors will share one thing in common though… none will be returning up the hill for some time to come.

P.S. I thought I might use another natural disaster analogy but with the earthquake in Lima Peru, a Tsunami threat in the Pacific, Hurricane Flossie hitting Hawaii, and tropical storms Erin in the Gulf and Dean in the Caribbean, I thought it might be in better taste to choose the avalanche!