Friday, July 27, 2012

Change of Address

The Lehmann Letter (SM)

Dear Reader,

The Lehmann Letter has a new address:

Please go to to view the latest post as well as the following posts which you may have missed:

July 26: Business Investment Disappoints

July 25: Real-Estate Rebound?

July 24: Looking for a Silver Lining

Thank you for your patience during this transition and accept my apologies for any inconvenience. 

Please contact me at if you have any questions.

Yours truly,

Mike Lehmann

Monday, July 23, 2012

Greece’s Grinding Deflation: A Precedent for Spain and Italy?

The Lehmann Letter (SM)

Stocks opened lower today because of fears regarding Spain’s economy.

Will Spain go the way of Greece?

A July 20 article in The Wall Street Journal discusses the circumstances that led to Greece's grinding deflation.

This article serves as an excellent case study of the cost-dilemma facing Europe's southern periphery: Spain, Italy and Greece.

“Greeks Brace for More Pain on Wages”

Here are some key excerpts, beginning with Greece's entry into the euro zone and the inflationary process that boosted wages to uncompetitive levels.

“Money was flooding into Greece's economy, spurred by European Central Bank interest rates that were suited to a stagnant Germany but were too low for fast-growing parts of the euro-zone periphery. Banks and bond markets lent freely to the periphery, believing the risks were equally low everywhere in the currency zone.

"In Spain, Portugal and Ireland, the private sector went on a borrowing spree. In Greece, a public sector rife with waste and patronage was the main conduit of the credit bubble. The effect was similar: Inflated demand for goods and services sucked in imports while pushing up domestic prices and business costs. The trade deficit soared as the whole country spent more than it earned, requiring more foreign credit to cover the gap.”

The remaining excerpts describe Greece’s struggle to reduce its wages to regain competitiveness with other European economies.

“Greece, like other euro members that now need financial help, struggled to compete in the European and global economies as cheap credit and structural problems inflated prices and wages faster than its palette of products could justify. Now, lacking a national currency that can depreciate to make its goods cheaper in foreign markets, it must embark on a grinding "internal devaluation," pushing down its wages and prices….

“Greece, Spain, Portugal and Italy all face the same arduous route to recovery… They must push down wages and prices at the same time as they labor to pay down heavy public or private debts….

“In February, Greece's main creditors, the International Monetary Fund and the European Union, forced the government to cut the national minimum wage by 22%—32% for young workers—and made sector-specific pay deals between unions and private employers expire faster….

“Wages in much of Greece's economy have already fallen some since the country's recession began in late 2008. But the EU and the IMF say internal devaluation has a long way to go before Greece is competitive enough internationally to begin an export-led recovery.

“Estimates vary on how much prices need to fall in the euro-zone periphery, relative to the core economies. Economists say Greece and Portugal face the biggest challenge, while Spain and Italy need smaller but still painful adjustments.

“The EU-IMF bailout program for Greece seeks to cut labor costs by 15% in the next three years. A recent report by economists at Goldman Sachs says that, without major structural reforms, Greece would need an internal devaluation of nearly 30% to turn around its trade balance and end its dependence on foreign borrowing.”

Greece has a bitter pill to swallow. It may be a foretaste of what awaits Spain and Italy.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, July 20, 2012

Business Sales Stall

The Lehmann Letter (SM)
Manufacturing and trade sales have stalled according to a recent Census Bureau report:

They had been recovering well from the recession, but then they declined in April and May (the latest available data). Sometimes there’s a hiccup in the data, and that could be the case here.

But it’s not the only evidence of manufacturing weakness. The Purchasing Manager’s Index contracted in June after a couple of years of expansion and this week the Federal Reserve’s measure of industrial capacity utilization remained flat:

We have a bifurcated economy. There has been recovery from recession, but new areas of weakness may be emerging.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, July 19, 2012

Existing Home Sales Remain Weak

The Lehmann Letter (SM)

The National Association of Realtors continues to speak optimistically of a housing recovery because of improved affordability, shrinking inventories and firmer prices:

But June existing home sales fell to 4.37 million. Place that number on the chart and decide for yourself.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

What do you think?

A recovery may be imminent. Some of the housing data is up. (Yesterday’s Letter reported a jump in housing starts.) But consistent evidence of strength remains elusive.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, July 18, 2012

Housing Starts: Big Jump

The Lehmann Letter (SM)

Housing starts enjoyed a big jump in June to 760,000 the Census Bureau reported today:

Let’s hope that’s the sign of recovery that many optimists have said we would soon see.

Now take a look at the chart and update it with that 760,000 figure (the chart’s scale is in thousands, so just use 760). Then ask yourself how far we have to go before housing starts are anywhere near normal. 

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

It will be a while, won’t it?

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, July 17, 2012

“We always get the majority we need."

The Lehmann Letter (SM)

“We always get the majority we need."

That’s a quote from German Chancellor Angela Merkel according to a July 15 Wall Street Journal article:

“Merkel Says Future Bailout Liability Is Still Undecided” 

Many have criticized German Chancellor Angela Merkel for indecision in the face of the euro crisis: Waffling to placate the shifting moods of her electorate. Others have faulted her for doctrinaire fiscal and monetary austerity. Few in America have lauded her for vision, statesmanship and leadership.

But the Wall Street Journal article portrays a leader confident in her role, deliberately putting into place the building blocks of a new European monetary union.

Here are key excerpts.

First, the issue at hand:

“German Chancellor Angela Merkel on Sunday said the question of liability for future bank bailouts in Europe hasn't yet been decided, dismissing criticism that she caved on key positions at a recent summit of European Union leaders.

“Ms. Merkel's comments come just days before Germany's parliament is set to vote on whether to approve up to €100 billion ($122 billion) in loans to refinance weakened Spanish banks. The vote is widely expected to pass, but criticism is growing at home that Ms. Merkel may be allowing European leaders to water down conditions placed on such bailouts in the future…..”

Then the key point:

“"We always get the majority we need," Ms. Merkel said…..

“Ms. Merkel is riding a wave of popularity among German voters. A recent poll put her approval ratings at nearly 70%, largely for her handling of the euro crisis. Ms. Merkel said that her European policies would be the central plank in next year's general election, expected to be held in September 2013.”

That looks like someone who is confident that she can build a united Europe around a strong and stable German economy.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, July 16, 2012

Housing Assistance: A Radical Plan

The Lehmann Letter (SM)

Many criticized the 2008 bailout of American banks for failing to also bail out mortgage debtors. Now banks that received public assistance have foreclosed on mortgages owed by those debtors. Large numbers of these homes remain vacant, exacerbating the housing slump.

Other borrowers are under water – owing more on their homes than they are worth – because home values have fallen. They can’t obtain refinancing because the new mortgage would exceed their home’s value. Some borrowers have walked away from their homes and debts, assuming that their homes’ values will never exceed what they owe on them.

As a result many neighborhoods are blighted with vacant homes that depress the value of the housing stock. This contributes to the balance-sheet slump bedeviling American households.

Despite suggestions that federal legislation enable banks and borrowers to write down the value of distressed homes, no national program has emerged.

Now some officials in Fontana, CA are exploring a radical way out.

Read all about it in the July 15 New York Times:

“California County Weighs Drastic Plan to Aid Homeowners”

Here are some key excerpts from the article.

“Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County, where Fontana is one of the largest cities, are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.
“Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property….
“The idea to use eminent domain to seize mortgages first came from a group of venture capitalists in San Francisco, Mortgage Resolution Partners, who would collect a fee for each of the restructured loans. The firm is also trying to persuade officials in Nevada and Florida to try the idea….

““We have what we regard as a systemic problem, but it’s felt most urgently at the local level,” said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners. “We have all these people who want to be able to stay in their homes and keep that, but it is getting to be impossible. Until you fix this problem, you can’t fix any other problems.”
“As for the group’s eminent domain idea, “if it works, every mayor of every city is going to want to do this,” Mr. Gluckstern said….
Under the current proposal, only homeowners who are current on their payments would be eligible for the program, a policy some have criticized because it does little to help the neediest people.”

Drastic problems elicit drastic solutions.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

(To be fully informed visit

© 2012 Michael B. Lehmann