In this issue:

Housing Bubble Near Bursting; Mortgage Refis in Free-Fall

Households Cut Back on Mortgage Refis

Fed Gov. Bernanke: Don't Pop the Bubble!

Steel Prices Continue To Surge Upward

Austerity, Ecologism Promote Spread of West Nile Virus


From Volume 3, Issue Number 24 of Electronic Intelligence Weekly, Published June 15, 2004

U.S. Economic/Financial News

Housing Bubble Near Bursting; Mortgage Refis in Free-Fall

On the night of June 7, the Ohio-based Dominion Homes shook the U.S. housing industry. Dominion, which does all of its business in Ohio and Kentucky, announced that its gross home sales for April and May of this year, had fallen 17% below sales of April and May of last year. However, when cancellations were factored in, its net sales had declined 35% from the same two months last year. On June 8, Dominion's stock price fell 15% on the NASDAQ stock exchange.

Dominion had home sales of half a billion dollars last year, which puts it in the middle tier of U.S. home building companies. The two biggest U.S. home building companies, Pulte and Lennar, each raked in $9 billion in home sales last year. However, on June 8, as the news of Dominion's problems spread, the stock of some of the biggest U.S. home building companies—Lennar, Toll Brothers, and Centex—each lost 3% on the stock market.

There has been an attempt by the financial media to belittle the portent of Dominion's sales fall, by stating that 70% of Dominion's business consists of first-time home-buyers, who are heavily dependent on the level of interest rates to finance their homes. When rates move up, they flee the market. The claim is that the big home-builders sell to people who have owned one or more homes previously, and are committed to getting a more expensive home, even if interest rates continue to rise. But there is a difficulty here: To trade up, a home-buyer must first sell his old home. "First-time buyers are the suckers who are supposed to buy my house at its inflated price so I can move to a McMansion," stated Northern Trust Bank chief economist Paul Kasriel. But, Kasriel added, if the first-time buyer (sucker) can't buy the house from the person who is planning to "move up" to a more expensive new home, "there might be a problem."

Households Cut Back on Mortgage Refis

The biggest threat to the housing market, is the rate at which households are cutting back on their financing of home mortgages, prior to a formal announcement of higher interest rates by the Federal Reserve. For the week ending June 4, 2003, the level of U.S. home-mortgage financing was at its peak. Now, the Mortgage Bankers Association (MBA) reports that for the week ending June 4, 2004, its measure of mortgage financing—the Market Composite Index of home financing—fell to a level 569, a stunning 68.0% fall from the level of the comparable week last year. Further, the MBA's Refinancing Index fell to a level of 1,363 for the week ending June 4 of this year, an 86.3% plunge from the level of the comparable week last year.

The value of U.S. housing-market paper outstanding is more than a combined $13 trillion.

Fed Gov. Bernanke: Don't Pop the Bubble!

Federal Reserve Bank of Minneapolis governor Ben Bernanke, asked about the Federal Reserve's role in dealing with speculative asset bubbles such as in housing, argued against raising interest rates to deliberately pop them. "I think it's extraordinarily difficult for the central bank to know in advance, or even after the fact, whether or not there's been a bubble in an asset price," he told Minneapolis Fed Research Director Art Rolnick in an interview this month. "If a bubble does exist, there is no guarantee that an attempt to 'pop' it, won't lead to violent and undesired adjustments in both markets and the economy," Bernanke said. "It is rarely, if ever, advisable for the central bank to use its interest rate instrument to try to target or control asset price movements," he added.

Were the bubbles to burst, however, Bernanke urged flooding the markets with liquidity to bail out the financial system. "To the extent that there are large movements in asset prices that threaten the stability or functioning of exchanges or other institutions," he said, "the central bank may have to play a role to try to stabilize those institutions, as the Fed did in October 1987 for example," referring to when the Fed massively pumped up the money supply after the stock market crashed.

Asked whether the Federal Reserve could not afford to let large banks fail, because of the systemic impact on the rest of the economy (the "too big to fail" policy), Bernanke said that in general a troubled bank should be allowed to fail. But, he said there would be "cases where the central bank and the [Federal] Deposit Insurance Corporation decide to prevent the failure of a large institution in the interest of systemic stability."

Steel Prices Continue To Surge Upward

Steel prices continue to surge upward, even as China announces it has begun to control the pace of growth, the Washington Post reported June 6. Comparing the level of May of this year, to that of May 2003, the price of hot-rolled steel has risen by 114%, cold-rolled steel is up 74%, and steel plate is up 114% on the spot market, according to Tom Stundza, a metal markets expert at the trade magazine Purchasing. Since the beginning of June, the price of hot-rolled steel climbed further to $590 per net ton, by far the highest level during the past decade.

The steel price increase is passed along to makers of construction materials, kitchen appliances, heating and cooling systems, and other products with high steel content.

** In the last week of May, three heating and cooling equipment suppliers—Carrier Corp., Evapco Inc., and McQuary International—announced price increases of 4-6% due to steel costs, according to the Air Conditioning, Heating & Refrigeration News online trade journal.

** Maytag Corp. a home-appliance producer, announced a major restructuring on June 4, cutting 20% of its salaried workforce, blaming cutbacks on declining sales and rising steel prices.

** Several companies are hit with big bills for steel, but are able to pass on only some of the increase. Adelphi, the large American auto-parts supplier, reports that it has paid 30-50% more for steel since the beginning of the year, but has been unable to pass the increases on to its corporate customers in the auto industry. But this situation is about to break soon.

Many "analysts" attributed the steel price inflation to the large demand for steel by China. During the past two months, Beijing has slowed down the country's industrial growth, but the steel price keeps rising. It should be kept in mind, that there is a very active steel spot market, where buyers can affect prices. However, as Lyndon LaRouche points out, with regard to hyperinflation, one should look at deeper processes, at Federal Reserve Chairman Alan Greenspan's continued policy of monetary emission, and several years of runaway inflation in asset prices.

Austerity, Ecologism Promote Spread of West Nile Virus

Five human cases of West Nile Virus have already surfaced this year in the U.S., while hundreds of birds have tested positive across the country since April. Fiscal austerity and environmentalism have lead to the deadly policy of letting West Nile Virus hibernate and spread across the U.S. since 1999 when it first struck New York/New Jersey. States have cut public health budgets, and most have adopted the "4-D" defense:

* avoid going outside at dusk and dawn;

* dress with full length sleeves and pants;

* use DEET insect repellent; and

* drain all standing water.

Lyndon LaRouche's call to bring back DDT spraying is the only sane and now urgent solution to a spreading disaster.

The latest human case of WNV was announced in California June 8. A 40-year old woman became ill with flu-like symptoms in mid-May and was subsequently diagnosed with the disease. She fortunately has recovered, but the number of positive infected birds found in California is in the hundreds between April and now. This is early in the WNV season and is repetitive of what happened in Colorado between 2002 and 2003. Colorado had only 12 human cases in 2002 with no fatalities, but then in 2003 they had a "deluge of serious cases," in the hundreds. The four other human cases of WNV reported this year have been in Arizona, New Mexico, South Dakota, and Wyoming.

The states which have recently reported regular findings of positively infected birds over the last three weeks are: all of the above states, plus Michigan, Missouri, Oklahoma, and Virginia.

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