CIBC World Markets' Avery Shenfeld shares his views on the U.S. economy, oil prices, housing, and employment with Bloomberg's Tom Keene and Ken Prewitt.
APRIL 19, 2011
TOM KEENE, HOST, BLOOMBERG SURVEILLANCE: Avery Shenfeld joins us, CIBC World Markets. Avery, good morning.
AVERY SHENFELD, MANAGING DIRECTOR, CIBC WORLD MARKETS: Good morning.
KEENE: Is there a housing recovery in sight?
SHENFELD: Not really. You have to look - I mean we did see a bounce in housing starts today. But if you saw the Homebuilders Index earlier, you could see that there is a lot of pessimism. There is still lots of inventory of newly built houses, and, of course, a huge inventory of existing homes waiting to be cleared out.
If you go back to 2008, the housing starts numbers are basically bouncing aimlessly in a range between 475,000 and 675,000. So these latest numbers are really just part of that very bouncy, but still sideways trend.
KEENE: Where is your first quarter GDP? Michael Moran and Daiwa sub- two percent. Have you gone sub-two percent?
SHENFELD: We haven't gone quite so low. We're sitting at about 2.5 percent. And the reason is that if you look at the industrial production numbers, they still looked quite strong for the first quarter, which is telling you that the good sector - at least in production - was fairly healthy.
Our suspicion is that a good deal of that must have ended up in inventories because we are seeing the demand side numbers, which is what others I think are reacting to pushing their forecasts so low, are, in fact, responding to.
So it looks to me like we are at 2.5 percent, but that's still - you know, it's still a pretty big disappointment. Remember this was the quarter we were supposed to get the big benefits of the tax cuts announced in December, and they basically got eaten up in part by high gasoline prices and some disappointments elsewhere.
KEN PREWITT, BLOOMBERG NEWS: Well, what happens - this is sort of a moratorium so to speak on foreclosures while banks try to get their paperwork straightened out. Where are we in that process?
SHENFELD: Well, there are still some details being ironed out. The way this story is talking about dealing with some of the foreclosures that had, in fact, taken place under procedures that are now being accused of being unfair. But eventually we're going to get that whole process unstuck and going again.
In my mind, that is actually a bit of a healthy development. You know, while we need to get this cloud lifted, we need to get the houses into the hands of people who are paying their mortgages, in terms of sort of start the process of the righting the ship.
But in terms of actually getting a big pick up in construction, I think the only good news here is that we are at such low levels that even if in 2012, for example, we are running at 700,000 or 800,000 starts, that is still an abysmal level by historical standards. But it would represent a nice percentage increase. So the irony is it is hard to go lower, and that's I guess the best news.
KEENE: Avery, your team has been way out in front on oil. You called for higher oil prices before anywhere else. Oil, okay, a little bit of a respite - Brent $119.85; NYMEX $105.97. Will this be a stochastic surge, a pointy surge up and then down in hydrocarbons and commodities in general? Or is there a new persistency here at higher prices?
SHENFELD: You know, I think there is a bit of both. There may well be a secular trend that we are in where troughs in commodity prices at the lows of cycles are not as low as they used to be and peaks are generally somewhat higher than they used to be, which really reflects the growth we are seeing in emerging markets, their heavy use of commodities as part of that, and, at least for awhile, some need to invest again, to rebuild supply. So I think we are in for some cycles where peaks are a little higher than they used to be.
That said, if we look at the current situation, in my mind there may be - the next move might be actually a bit lower. We have those emerging markets that I talked about raising interest rates, trying to deal with inflation by effectively slowing economic growth. And so we may lose a bit of the juice that we are now seeing in commodity markets over the next six months or so.
PREWITT: Well, given that prices are down so much, and mortgage rates are the lowest pretty much they've ever been, what are people waiting for? I mean is it just uncertainty over the labor market?
SHENFELD: I think that it is not that there aren't buyers. I mean we do see people out kicking the tires at these very low prices. But if there was simply - you know, the scale of the shock wave that hit and the overhang of houses to be cleared out just means that even when buyers do return, even when they recognize that these are very low prices, even with mortgage rates that are quite low, it is simply going to take time to clear out all that inventory.
And that is somewhat true in the - in the new home market it is getting a little bit better because we are not building, we are not completing very many houses now. There are only about 500,000 houses being completed a month; that is half of what we would normally see at the bottom of a deep recession. So that is helping, but, you know, I think the existing home market also needs to be repaired before builders gain the confidence. So it is just simply a matter of time.
PREWITT: Well, have we seen kind of a shift in attitude on a national basis, that people were scared by the price decline in housing and decided - you know, just like people got turned off by the stock market?
SHENFELD: That may be part of it. And, of course, for awhile it was also - and for some still, it was difficult to get mortgage credit. Not just the buyers were scared, but the financiers were scared, too, about lending - you know, having been burned by lending too much to the household sector, the financial system doesn't tend to make the same mistake twice.
So we suddenly became a market that was erring on the side of caution, the mortgage insurers were really the only game in town. So I think part of it was on the credit side as well. But it was a mutual feeling, the borrowers didn't want to borrow and the lenders didn't really want to lend.
So for awhile, the pace of clearing out this inventory was stalled. It also takes awhile before the sellers recognize what their house is really worth and agree to cut the price enough to really get the market moving, and that's where we are now. But prices have still been edging lower and so we may well be still another five percent or so for the bottom of house prices.
KEENE: Avery, your colleague, Benjamin Tal, has just been brilliant on the self-employed in the United States. Give us an update. Are our self- employed recovering?
SHENFELD: You know, I think we are starting to see a bit of a recovery there. It is part of a general recovery in the overall business conditions.
You know, we do have the labor market recovering. If you really want to know the key to the housing market, it is that we need people without jobs to get jobs again.
But it, again, goes back to the scale of the original decline. We've never seen recession that wasn't called a depression, where we lost six percent of total employment. And if you go back since the post-war period, we've never had that deep a recession that then didn't have an equally quick rebound in job creation.
So until we make more progress on the labor market as a whole, I think both the self-employed and the people who have pay jobs are still going to feel a little bit cautious. Remember, we see that in the wage numbers, which are climbing at an extremely slow pace these days.
KEENE: Let's leave it there. Avery Shenfeld, thank you so much for that update. CIBC World Markets, this as housing permits and starts bounce along, a little better statistic today.
08:44
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