Its time to learn from our mistakes ...... or is it?!!!

It seems to me that the credit rating agencies are try to "learn" from their past mistakes and spice up their tarnished public image …. But that they are barking up the wrong tree. Do you recall the notices from the rating agencies warning investors not to invest in the Fannies and Freddies of this world? No, neither do I. And these entities were assigned triple A status being backed by the full faith of Uncle Sam. How about the repeated warnings about Mortgage Backed Securities? Or the bonds of Lehman or AIG? Or sovereign debt of bankrupt countries?

So now lets learn from our mistakes. And repeatedly warn that the US faces a downgrade due to its debt ceiling fiasco. However, in attempting to being extra vigilant and super duper cautious, they clarified their warning of a downgrade by saying that their concerns would be lessened if the US reached some deal on the debt ceiling, or better yet, eliminated its self imposed debt limit altogether.

The US should have had a downgrade on their sheer quantities of debt a long time ago, and they should be lowered again if the ceiling is raised. The ceiling is there for a reason. To remove it altogether, is adding to the problem, rather than solving it. It is like adding wood rather than water to a burning hut. It should not lessen Moody's concerns, it should add to them.

The last 15 years have seen a bloated economy take on increasing amount of debt, live far beyond their means, all due to interest rates way below market level. Banks have been expanding the money supply based on accounting gimmicks, worsening the problem. We don't need the credit agencies coming to tell us that they would have lower concerns if the debt ceiling would be eliminated altogether. I cant see how that would solve any problem.

Sssshhhhh - did we just have good housing data?

With the markets currently wholly dictated to by to-ings and fro-ings on several debt issues around the globe, its largely gone un-noticed that the weekly/macro data is still ongoing and can give us some clues as to what is going on with the economy.

Yesterday's release included the Building Permits and Construction starts data in the US. As a reminder, the building permits is a monthly data that shows the annualized number of permits for new construction projects issued by the Government. Housing Starts is also released monthly, and shows the annualized number of new homes that began construction in the given month. Yesterday, the June data was released. Housing permits: 624,000 and housing starts 629,000.

So why is that good news?

The graph above shows the housing permits and starts over the last 10 years. The 2006 peak, 2009 trough decline of 1.5 million was of epic proportions, in the sense that it was the 3rd worst decline on a population adjusted basis in the last 85 years. However, we have seemingly been bouncing along the bottom since then. At the peak, the housing sector was a major source of growth for the economy; the decline since then has contributed in no small part to the weak growth and high unemployment. However, with the passing of time, slowly but surely it is no longer a drag on the economy. Its not much of a growth booster either, but at least its not a drag. We have been bouncing along the bottom, sort of in neutral territory. .

Remembering though that being that the data is a monthly reading, it is quite "noisy". If we were to zoom in to the housing permits since the end of 2008, but averaging the monthly reading to give a quarterly reading to smooth out the noise, we would get the following graph:

We can see that after an improvement of 125,000 between the beginning of 2009 and the beginning of 2010, most of that gain (100,000) was subsequently given back in the following year. Analyzing post world war 2 housing recessions, it is fair to state that it takes about a year to a year and a half for the full effect of a housing decline to ripple its way through the rest of the economy. With the most recent decline ending in June 2010, it is also fair to say that we may well be close in time for that decline to have been fully felt. With yesterdays, strong readings, the Q2 2011 housing permits and starts, will average over 600,000 (the above graph as taken from the Fed's website ends Q1 2011). That would make it the best quarter for over a year.

True, it may be a one off wonder. However, the difference with the 2009 advance, is that this one is without the artificial stimulation of a housing credit stimulus.

Yields on a one way journey

I have noted in previous posts that with the end of QE, the only way to go in terms of yields is up. The Fed was by far and away the dominant buyer of Tresuries, and in the absence of a different buyer to step up and take their place, price would undlubtedly fall (and yields rise).

Thats taking a look on the demand side. What about on the supply side? Since 16th May, total US debt has been flat at $14.345 billion, due to the restriction of the debt ceiling. Presumably, after much political fighting, the debt ceiling will be raised once more. At which time, the Treasury will not only issue as much debt as before, but massively more in the short term to catchup with the ongoing run rate. Ie it will need to plug a gap of over 2 months of accrued Tresaury issuance, and also to refund the retirement accounts it has been borrowing from to buy some more time.

SO we are looking at rising yields due to a decrease in demand, and a pretty hefty increase in supply.

We started seeing that last week, with the move in the 5 year the largest move in percentage points ...... EVER!!!

Perhaps the (temporary) rescue of Greece should convert the PIGS into PISA? I wonder who the A stands for ...... answers on a postcard!!!