Dotzour Comments on Inflation, Recession, China and REO Damage
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Dotzour Comments on Inflation, Recession, China and REO Damage
Release No. 14-0311
COLLEGE STATION, Tex. (Real Estate Center) — Chief Economist Dr. Mark Dotzour is crisscrossing the nation delivering his economic message and collecting valuable data for the Real Estate Center at Texas A&M University. Here is a recap of this week’s findings gleaned from meetings of the National Association of Business Economics in Washington, D.C.
Among the comments he heard, were:
• “Clearly there is virtually no threat of inflation in the next two years.”
• “There’s virtually no chance of the Fed increasing interest rates (maybe a symbolic small move aside).”
• “The last recession, the Fed waited until unemployment was 5.5 percent before tightening.”
• “We won't get to that level for several years.”
• “The threat is for deflation across the globe, with the exception of China.”
• “China’s money supply is up 30 percent from last year. Our M3 (the Fed’s measure of the money supply) is virtually unchanged from a year ago, and available credit is less than last year.”
“The Congressional Budget Office said the United States is going to be unable to pay for the social contract with America,” said Dotzour. “It’s only a matter of when and how the adjustments for failed promises have to take place. Medicare, Medicaid and Social Security cannot be funded at current levels of spending.”
Dotzour heard a representative of Barclays, a worldwide financial services provider, say that the real damage to housing values occurs when the real estate owned (REO) dominos begin to topple.
“Just because a house gets foreclosed, prices don't fall,” said Dotzour. “It's when the REO is disposed that the value impact occurs. Foreclosures have been postponed, first due to a moratorium and now due to banks having to prove they tried a modification before they can foreclose. So the major price impact on the housing market is not over yet.”
If the core rate of inflation drops to less than 1 percent, expect the Fed to re-engage in quantitative easing (printing money to create inflation), reported Dotzour.
The news from across the pond is not good either, he said.
Dotzour heard a commodity specialist say that China is purchasing way more hard metals than they need for the level of industrial production that they are experiencing. He said it was clear that they are stockpiling these hard metal commodities.
“This reminds me of the oil market the month before the summer Olympics in 2008,” said the Center’s chief economist. “China hoarded diesel in case they had power failures at the games.”
Prices for all commodities have skyrocketed since the day the Fed announced quantitative easing. An oil representative said that oil could stay high and go higher because marginal demand is coming from China and India.
“If and when China's bubble blows, the entire commodity complex could come crashing down fast,” said Dotzour.
“All of a sudden Russia, Brazil and Australia don’t look so robust. Money will start flowing hard into the United States. Again, this makes me think ten-year Treasuries might look pretty saucy right now at 3.7 percent.
“Surprisingly,” reports Dotzour, “nobody is really talking about states, cities and school districts. Their layoffs and reduced spending will impact local suppliers all over the country.”
“None of this is pretty,” said Dotzour, “but investors and business people need to be aware of the environment that they are working in.”
Dotzour Comments on Inflation, Recession, China and REO Damage
Release No. 14-0311
COLLEGE STATION, Tex. (Real Estate Center) — Chief Economist Dr. Mark Dotzour is crisscrossing the nation delivering his economic message and collecting valuable data for the Real Estate Center at Texas A&M University. Here is a recap of this week’s findings gleaned from meetings of the National Association of Business Economics in Washington, D.C.
Among the comments he heard, were:
• “Clearly there is virtually no threat of inflation in the next two years.”
• “There’s virtually no chance of the Fed increasing interest rates (maybe a symbolic small move aside).”
• “The last recession, the Fed waited until unemployment was 5.5 percent before tightening.”
• “We won't get to that level for several years.”
• “The threat is for deflation across the globe, with the exception of China.”
• “China’s money supply is up 30 percent from last year. Our M3 (the Fed’s measure of the money supply) is virtually unchanged from a year ago, and available credit is less than last year.”
“The Congressional Budget Office said the United States is going to be unable to pay for the social contract with America,” said Dotzour. “It’s only a matter of when and how the adjustments for failed promises have to take place. Medicare, Medicaid and Social Security cannot be funded at current levels of spending.”
Dotzour heard a representative of Barclays, a worldwide financial services provider, say that the real damage to housing values occurs when the real estate owned (REO) dominos begin to topple.
“Just because a house gets foreclosed, prices don't fall,” said Dotzour. “It's when the REO is disposed that the value impact occurs. Foreclosures have been postponed, first due to a moratorium and now due to banks having to prove they tried a modification before they can foreclose. So the major price impact on the housing market is not over yet.”
If the core rate of inflation drops to less than 1 percent, expect the Fed to re-engage in quantitative easing (printing money to create inflation), reported Dotzour.
The news from across the pond is not good either, he said.
Dotzour heard a commodity specialist say that China is purchasing way more hard metals than they need for the level of industrial production that they are experiencing. He said it was clear that they are stockpiling these hard metal commodities.
“This reminds me of the oil market the month before the summer Olympics in 2008,” said the Center’s chief economist. “China hoarded diesel in case they had power failures at the games.”
Prices for all commodities have skyrocketed since the day the Fed announced quantitative easing. An oil representative said that oil could stay high and go higher because marginal demand is coming from China and India.
“If and when China's bubble blows, the entire commodity complex could come crashing down fast,” said Dotzour.
“All of a sudden Russia, Brazil and Australia don’t look so robust. Money will start flowing hard into the United States. Again, this makes me think ten-year Treasuries might look pretty saucy right now at 3.7 percent.
“Surprisingly,” reports Dotzour, “nobody is really talking about states, cities and school districts. Their layoffs and reduced spending will impact local suppliers all over the country.”
“None of this is pretty,” said Dotzour, “but investors and business people need to be aware of the environment that they are working in.”
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Disclaimer: The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of the HRIS.
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