Foreclosures Set New Records, Inflation at a 17-Year High, Georgia, and States Gambling With Pensions

August 14

U.S. Foreclosures Rise 55%, Bank Seizures Reach High (August 14 - Bloomberg)

Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent as falling prices made it harder to sell or refinance.

Bank seizures rose 184 percent to 77,295, the steepest increase since reporting began in January 2005, RealtyTrac Inc., an Irvine, California-based seller of foreclosure data, said today in a statement. More than 272,000 properties, or one in 464 U.S. households, got a default notice, were warned of a pending auction or foreclosed on.

"It's getting worse," Rick Sharga, RealtyTrac's executive vice president for marketing, said in an interview. "The number of properties that have been foreclosed on by the banks and still haven't sold is the highest we've ever seen."

The numbers: 1 in 464 households receiving foreclosure notices for the month translates into 1 in every 38 households entering foreclosure this year. As you drive along the road passing houses, count to 38 and put a big red mental “X” over that house. Next, 77,294 bank seizures translates into nearly 1 million homes being repossessed for the year.

So that means that whatever “existing home sales numbers” you read about need to be reduced by 20%-25% to account for the fact that they were “sold” to a bank and not to a homeowner.
Most importantly, there is no sign in this data that we are yet at the bottom, or even near it.
The trend is down and getting steeper.

Against this backdrop, we have the US government still claiming that the US economy is expanding. That is highly unlikely.

Housing Rebound in Cleveland Signals Bad News for U.S. Market (Aug. 14 - Bloomberg)

The good news in the worst housing slump since the Great Depression is that the market in Cleveland is recovering. That's also the bad news.

A housing revival in this city of 438,000 on the shore of Lake Erie may portend deeper drops in U.S. markets. Prices for entry level homes in Cleveland had to tumble 37 percent from a September 2005 peak to an almost 11-year low in March before enticing first-time buyers. That may be a sign that U.S. markets with the biggest price increases during the 2000 to 2005 boom have much further to fall before stabilizing, said David Blitzer, chairman of Standard & Poor's Index Committee.

As I wrote about last year, the most probable ‘floor’ for house prices is either exactly where they were at the start of the bubble or perhaps a bit lower.

Cleveland is already there, and had to get there before seeing a positive sign in its housing sales statistics. This process will be repeated in numerous other communitie, regardless of whether they ‘saw a big run up’ or not.

Consumer prices see biggest on-year jump since 1991 (August 14 – MarketWatch)

U.S. consumer prices jumped a greater-than-expected 0.8% in July, marked by big increases in energy, food, clothing, lodging and cigarettes, the Labor Department reported Thursday.

Over the past year, consumer prices were up 5.6%, the biggest on-year increase since January 1991. The CPI has surged at a 10.6% annualized rate in the past three months, the second-worst spike in inflation in the past 26 years.

This is a horrible rate of inflation, even watered-down as it is by statistical trickery.

At the moment of this writing, bonds are up on the news when they should be down (a lot), and gold is down more than $17 on the day it was instantly crushed upon the release of this news. That has been happening a lot lately and is a mysterious bit of behavior for the most classic inflation hedge of them all.

The “reason” that will be given in the newspapers is that the dollar went up, because high inflation makes it more probable that the Fed might, someday, maybe, raise interest rates, which would be dollar-supportive. Of course, lost in this logic is the behavior of the stock market, which should be reacting badly to the prospect of rate hikes and a stronger dollar, but which is rocketing up right now instead.

Even more oddly, bonds should be down hard on the news of inflation and the prospect of a rate hike, but they are not.

At any rate, the odd sinking of commodities over the past few weeks (given the reports of rampant, world-wide inflation) is not likely to help inflation readings go down much any time soon. When things like lodging, cigarettes, and clothing are headed up, it takes a long time for a decline in the price of commodities and fuel to work their way into those products.

Georgia: A Blow to U.S. Energy (August 13 – Business Week)

The sudden war in the Caucasus brought Georgia to heel, reasserted Russia's claim as the dominant force in the region, and dealt a blow to U.S. prestige. But in this part of the world, diplomacy and war are about oil and gas as much as they are about hegemony and the tragic loss of human life.

Victory in Georgia now gives Russia the edge in the struggle over access to the Caspian's 35 billion barrels of oil and trillions of cubic feet of gas. The probable losers: the U.S. and those Western oil companies that have bet heavily on the Caspian as one of the few regions where they could still operate with relative freedom.

At the core of the struggle is a vast network of actual and planned pipelines for shipping Caspian Sea oil to the world market from countries that were once part of the Soviet empire. American policymakers working with a BP-led consortium had already helped build oil and natural gas pipelines across Georgia to the Turkish coast. Next on the drawing board: another pipeline through Georgia to carry natural gas from the eastern shore of the Caspian Sea to Austria—offering an alternate supply to Western Europe, which now depends on Russia for a third of its energy.

It’s pretty much a given now that when the US cares about some country’s democracy being threatened, there is oil somewhere in the story. Here we learn that Georgia is an extremely important transit location for the riches of the Caspian Sea to make their way to the West.

It seems equally likely that that West badly miscalculated, in fostering the impression that it would provide some support to the Georgian political leadership in any conflict.

States Double Down on Hedge Funds as Returns Slide (August 14 - Bloomberg)

Public pension funds in the U.S. are increasing bets on high-risk hedge funds and real estate in an attempt to fill deficits in retirement plans and make up for their worst performance in six years.

South Carolina's retirement system adopted a plan in February to invest as much as 45 percent of its $29 billion in hedge funds, private equity, real estate and other alternatives, from nothing 18 months ago.

The Common Retirement Fund [NY state], whose 2.6 percent gain in the year ended March 31 was its worst since 2003, is authorized to invest as much as a quarter of its assets in alternative investments. The fund doesn't have a deficit.

Public funds, which manage at least $2.45 trillion in assets, are trying to plug deficits and reverse losses that New York-based Merrill Lynch & Co. says averaged 5.1 percent in the year ended June 30.

Oy. This is depressing. State pension funds are seeking permission to place as much as 45% of pension assets into hedge funds, in a desperate bid to boost returns. I don’t know where they find such bad ideas. Hedge funds are largely unregulated and are the very definition of risk. On balance and over time we might expect them to return something pretty close to zero, as some will win and some will lose. A net zero game.

But in the world of pensions, where continuous compounded returns in the vicinity of 8%-10% per year are assumed, a negative 5.1% return is a gigantic disaster. It completely wrecks the miracle of compounding and immediately creates the need to “do something,” like either put more money in, or seek a risky, higher-yielding form of speculation.

The winners here? Hedge funds. They have a 20/2 fee structure meaning that they take 20% of all positive returns and 2% of principal, no matter what. Lose a bunch of money? Oh well, they still take the 2%. Heads they win, tails you lose. In aggregate, there is simply no way for everybody to make such outlandish returns in the market.

The losers here? Taxpayers.