REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Elizabeth Warren, chair of the Congressional Oversight Panel for bank bailouts, provides the unvarnished truth about the nation’s foreclosure problem in this interview with CNBC today.

Says Warren to homeowners: “Some of you should stay in your homes…and some of you don’t belong in those homes and you’ve got to be moved out. And frankly, those houses need to get back onto the market and get into the hands of people who can afford them. In other words, acknowledge the problem, deal with it, write off the losses and start rebuilding an economy on solid ground.”

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Understandably, this story is getting a lot of attention today since it does the U.S. military no good to have the best weapons systems in the world if it can’t get the key raw materials to build those weapons systems. This appears to be another case of the Chinese securing long-term supplies for key natural resources while other nations dither.

U.S. lawmakers called for a hearing after a government report exposed potential “vulnerabilities” for the American military because of its extensive use of Chinese metals in smart bombs, night-vision goggles and radar.

China controls 97 percent of production of materials known as rare earth oxides, giving it “market power” over the U.S., the Government Accountability Office said in the report obtained by Bloomberg News before its public release on April 14.

U.S. Representative Ike Skelton, chairman of the House Armed Services Committee, told reporters in Washington he would call for an inquiry to discuss the report.

China is a rapidly rising military and economic power and the fact is that they cornered the market on these rare earth metals that are essential for a lot of our advanced weapons systems as well as a lot of manufacturing in the United States,” Representative Mike Coffman, a Colorado Republican, who asked for the GAO report, said April 14 in an interview on Bloomberg Television. “We need to move aggressively on this issue now before it’s too late.”

It’s been a while, but, if memory serves, the U.S. military is dependent on China for a host of other goods all throughout the supply chain. Despite the Defense Department’s “second source” for virtually everything, many of those sources all come from some part of Asia and, years ago, it was said that if defense contractors were ever cut off from their suppliers half way around the world, he U.S. military would grind to a halt in six months.

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Consumer Prices Tame in March

The Labor Department reported that consumer prices rose 0.1 percent in March following no change in February and inflation certainly seems to be tame, at least when it’s measured by the government. From year ago levels, consumer prices are now 2.4 percent higher.

It’s funny to think that, as shown in the graphic below, year-over-year inflation now seems to be settling into the 2-3 percent range – the same level seen during 2002 to 2005 when the massive housing and credit bubbles were inflating.

Because recent increases in gasoline prices are not reflected in the latest data, energy prices were flat for the month but still sport hefty gains from a year ago – up 18.8 percent. Recall that the price of crude oil didn’t really start rising last year until late-May, so, there will be another couple months of big year-over-year increases, one of the major supports for the  current headline number.

That most curious of all inflation statistics – owners’ equivalent rent  – was down 0.1 percent in March and unchanged from a year ago. Somehow, housing costs are -0.6 percent lower than a year ago despite the constituent parts that would indicate otherwise as detailed in the latest BLS data.

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Xie: China Property Bubble Biggest in History

The latest data from China shows that buyers have been undeterred by the many efforts undertaken by the government to cool the housing mania that continues to sweep the country. Property prices rose at a record pace last month and former Morgan Stanley analyst Andy Xie again sounds alarmist as detailed in this story at China Daily.

Andy Xie, a former Morgan Stanley chief Asian economist, asserts that China’s property market is the biggest bubble in the history of finance, and only by raising the interest rate can the bubble be pierced, says an article in China Times. Here is an excerpt:

Xie underlines that priority should be given to increasing interest rates rather than to appreciation of the renminbi. Revaluation of the renminbi alone would further exacerbate the property bubble and inflationary pressure, potentially causing a major economic crisis in the next two years.

Actually, Xie believes that growing expectation of the yuan’s appreciation in financial markets is the most important reason for China’s vast property bubble. Massive hot-money inflows would spark excessive liquidity and speculation, fueling China’s property bubble.

According to Xie, in a normal economy, currency appreciation cools inflation by decreasing import prices. However, China imports mainly raw materials, equipment, and components. A modest currency appreciation would do virtually nothing to curb inflation.

You have only to look back at what happened in Japan in the late-1980s to understand the danger here. The significant appreciation of the Japanese yen beginning with the 1985 Plaza Accord turned what was, up until then, a garden variety asset bubble into a record-setting asset bubble, one that their economy is still recovering from two decades later.

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Retail Sales Surged in March

The Commerce Department reported that U.S. retail sales rose 1.6 percent in March, the biggest advance in four months, and data for prior months was revised sharply higher.

The March gain exceeded consensus estimates for a 1.2 percent increase and this follows upwardly revised gains of 0.5 percent in both January and February. On a year-over-year basis, retail sales were up 7.6 percent, the biggest annual increase since early-2006, however, the sales volume from 12 months ago makes for an easy comparison as  March 2009 marked the low point for the recession.

(more…)

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