U.S. Economic/Financial News

Top Economist: It's All One Bubble, and It's Ready To Blow

"The current surge in industrial commodity prices far outstrips anything we have seen in modern experience," said Stephen Roach, the chief economist at Morgan Stanley, according to the New Straits Times May 30. "The world is now in the midst of another bubble—this one in commodities. It, too, will burst. The only question is when."

Roach said the boom in commodities is essentially the same bubble that has shifted from the stock market to real estate, and now to primary materials.

"Breaking the chain of asset bubbles is up to the world's major central banks," he said. "It all boils down to whether they have the courage to do it. As I noted recently, I fear that history will not treat central banking kindly for its bubble-prone record over the past six years."

Business Schools Promote Enron-Style Formulas

The formulas used to create Enron will produce more debacles if business schools don't stop promoting them as gospel, wrote two Rice University professors in the May 27 Houston Chronicle.

"These formulas flow from something with the respect-inspiring name 'the Efficient Market Hypothesis.' Most managers (or academics) who use such formulas would be hard pressed to derive them or to list the assumptions on which they are based. And any interest in their testing these formulas on historical data is minimal. No need to verify that which you know to be true.

"This attitude is bad science and can be devastating for investors. The Enron case has not changed the fact that in business schools throughout the nation the same formulas that were part of Enron's problem continue to be taught uncritically as Holy Writ....

"The nation's business schools should make it their mission to launch a massive re-evaluation of the formulas that clearly drove the thinking at Enron, and begin a search for working alternatives. We very much fear that Thursday's guilty verdicts will result in no such re-evaluation.

"This does not excuse the activities of Lay and Skilling. But sending them off to prison for multiple lifetimes will not, by itself, prevent Enrons from occurring in the future.

"There are systemic model failures that are not being addressed and ought to be....

"Beyond an intensive re-evaluation of the EMH formulas, there are other things which should be considered by our federal regulators.

"At present, a company can sell somebody an option to buy a stock that the seller does not own. This practice is called selling an uncovered option. Enron apparently had sold lots of these, with the purchasers left with nothing after Enron failed...."

The piece was written by James R. Thompson, Noah Harding Professor of Statistics in Rice's Brown School of Engineering, and Edward E. Williams, Henry Gardiner Symonds Professor of Management at Rice's Jesse Jones Graduate School of Management.

Big Three Automakers Post Steep Declines in Sales

Hit by falling sales of SUVs and trucks amid high fuel prices combined with rising interest rates, Detroit's automakers announced June 1 an overall 9% drop in sales in May. General Motors said monthly sales plunged 12.4%, while Ford's sales were down 2.2%, and Chrysler's sales tumbled 10.9%. Vehicle buying plans, according to the University of Michigan's monthly survey of consumer confidence, fell to their lowest level in 15 years. In an omen of more layoffs, both GM and Ford said they would cut production in the July-September period, GM lowering its output by 8.4% and Ford by 2.4%.

Pending Home Sales Fell in April; Third Month in a Row

Pending home sales dropped 3.7% in April compared to March, and were down 11.7% compared to a year ago, the National Association of Realtors reported June 1. Declines were steepest in the Midwest and West, according to the National Association of Realtors. Meanwhile, Pulte Homes, the largest U.S. homebuilder, says orders in April and May plunged 29% from a year ago, as the cancellation rate rose to a staggering 27.4%. Mortgage loan applications fell in the week ended May 26 to lowest level in four years, as mortgage interest rates rose to a four-year high, the Mortgage Bankers Association reported.