04 July 2007

Global Exodus from US$ in Motion -- Local impacts?

Here's the latest heads up on the willingness of the rest of the world to continue to finance US debt. While most of the posts on this blog reference macro economic policy/events well beyond the jurisdiction of local players, these events do and will have significant impacts on how local events play out.
It's difficult to bring the implications of these macro level issues back down to earth in terms of local impacts and local policy responses. I'm not an expert and I hesitate to make any firm predictions, either bearish or bullish, but hopefully some local leaders will look beyond acrimonious ideological debates to think strategically. Here's a couple scenarios where it may be useful to monitor macro level trends which will support or undermine our ability to reach local goals. See what you think...

For starters, the balance between development value and timber value on forested parcels is shifting.

If interest rates rise it could have a significant impact on PL's debt restructuring. If the housing market continues to weaken, and developers continue to take a beating, and access to mortgage credit continues to tighten, then effort's to include development/fragmentation value in any valuation of PL assets will also be weakened.

At the same time the declining dollar could weaken access to US lumber markets for foreign exports, strengthening the position of remaining US producers in the long run even as lumber production in the northwest is off 13.9% on a year over year basis. Production cutbacks have managed to bring lumber prices off the floor although the Random Lengths Framing Index is still off 24% from two years ago and 33% from June 2004.

In addition some of these same variables belie the idea that county planning is the primary variable impacting housing affordability.

Rising or falling home prices ("affordability") should certainly be reviewed in the light of statewide and national trends. With subprime mortgage credit continuing to unwind it's no wonder that there's local pressure on the HumCo general plan to include development potential for higher value homes (the only ones that are selling) in pursuit of "affordability" across all income levels.

In the current housing market context groups like Housing for All would do well to consider the possibility that tax exempt bonds coupled with higher density infill and falling home prices could actually increase the housing availability for low-income residents. It could be time to start planning to implement a low-income housing project at the bottom of the housing recession in 2008 or 2009.

Global Exodus from US$ in Motion - July 3, 2007
By Gary Dorsch

Trading in the arcane world of foreign exchange is often akin to judging a reverse beauty contest. The trick to profitable trading is to pick the least ugly currency. Nearly all fiat or paper currencies are ugly, because the 18 of the world’s top-20 central banks are inflating the money supply at double digit rates. At the moment, the world’s two ugliest currencies are the Japanese yen and the US dollar.

The Bank of Japan pegs its overnight loan rate at just 0.50%, in a brazen effort to devalue the yen, to boost exports abroad, and prevent an abrupt unwinding of the mushrooming “yen carry” trade. Meanwhile the Federal Reserve is inflating its M3 money supply at a 13.7% annualized clip, according to private economists, which if correct, would be the fastest rate of expansion in more than 30-years.

US Treasury chief Henry Paulson, and former chairman of Goldman Sachs, GS.N, “monitors the financial markets closely,” and has reinvigorated the infamous “Plunge Protection Team,” which comes to the rescue of the US stock market whenever nasty revelations come to the surface. At the moment, Paulson’s grand strategy is to offset losses in the US housing sector with big gains in the stock market, to prevent the US economy from sliding into recession.

A key player in the “Plunge Protection Team” (PPT) is none other than Federal Reserve chief Ben “helicopter” Bernanke. Since the Bernanke Fed discontinued the decades-old reporting of the broad M3 money supply in March of 2006, the growth rate of M3 has accelerated from an 8% rate to a sizzling 13.7% clip, its fastest in more than three decades. The Bernanke Fed is preventing borrowing rates from rising at a time of explosive loan demand for US corporate mergers and takeovers, by rapidly increasing the US money supply....

The Fed has obscured its money printing operations by discontinuing the reporting of M3, in order to limit the damage to the fixed income markets. But word of the explosive growth of the M3 money supply is slowly leaking out, and taking its toll on the US Treasury Note market, which briefly tumbled to its lowest level in five years in June, lifting 10-year yields as high as 5.30%, before receding back to 5.00%, on a “flight to safety” from the riskiest of the sub-prime home loan market.

Because the US credit markets are swimming in a tidal wave of rising liquidity, there will always be bargain hunters who are happy to park excess cash into the bond market whenever yields surge higher. Asian central banks and Arab Oil kingdoms in particular, have been big buyers of US T-bonds over the past four years, and hold roughly $1.3 trillion of the IOU’s, but even this massive intervention couldn’t turn the tide of the four-year bear market.

But now there are indications that China’s insatiable appetite for US T-bonds is waning. Beijing was a net seller of $5.8 billion of US T-bonds in April, the first drop in Chinese holdings since October 2005, and sparking the recent slide that lifted 10-year yields by 70 basis points, at its high mark. Since Beijing unhinged the dollar from a fixed peg of 8.27 yuan in July 2005, the value of the US 10-year T-note, when converted into yuan, has declined by 15 percent. Earlier today, the dollar slipped to 7.59 yuan, or 8.9% lower since the yuan was freed from the dollar peg.

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