Monday, March 01, 2010

Happy Monday!

The markets returned to rally mode on Monday as the post-curling buzz wore off (how will we survive another 4 years without daily short-track speed skating updates or breaking down the biathletes fall training schedule?).

Most of the good vibe was derived from consumer spending numbers - up 0.5% - which I was actually surprised by. A portion of this has to do with higher prices for commodities, but even excluding that move, consumers did get their spending groove back. I'd guess that a fair portion of this might be due to the early tax filers that got rapid refunds and spent the cash before they left the mall :), but we'll have to see if it carries over into the next few months.

I read a great piece today on the problem with retail sales data collection. The author pointed out that the government does a random sample to determine whether sales are up or down, but they don't into account changes in the total number of stores operating. For example, consider the Penn Traffic bankruptcy. This may ultimately result in fewer grocery stores open in NY State. So, even if the average bill declines for each shopper from $100 to $90, but the same number of shoppers are now shopping in fewer stores, the average sales per store might look up.

A much better sample of retail sales data can be found via sales tax receipts which are plummeting around the country.

However, today it's all happy thoughts so plan accordingly :)

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I really enjoyed this article on the bubble in Chinese real estate that can't be popped because their entire economy is tied to this sector right now. Hmmm, that sounds vaguely familiar.....

The key difference between China's current real estate bubble and the U.S. bubble that popped in 2007 is this: In the U.S., it was individuals and lenders who made overleveraged, speculative bets via subprime mortgages. In China, explained Northwestern University researcher Victor Shih to NPR, the leveraged debt fueling the speculation comes from local governments, which have borrowed trillions of dollars worth of funds from China's banking system to develop real estate projects in their jurisdictions.

Shih has found that almost 50% of the Shanghai government's revenues come from land sales, and local governments have come to rely on this income."Local governments now are forming their own real estate developers and would actually buy land from themselves. As this becomes more common -- and it is becoming very, very common -- then local governments have a high stake in maintaining and increasing the value of real estate in their own jurisdiction," Shih observed.

Xie says this has led to a politically driven bubble, supported by local governments' need to meet the central government's growth targets. Speculators sense that the government will never let values fall, which encourages further reckless speculation. This overreliance on real estate development also threatens the nation's financial stability by increasing debt levels and by relying on overvalued land as collateral.

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