Friday, April 25, 2014
Capital Markets
By Louis S. Barnes Friday, April 25th, 2014
New data has pushed housing to the forefront of the recovery discussion. Can the economy recover without housing? What has gone wrong with it? If housing is de-emphasized as never since the Depression, what does it mean for inequality, the new darling of the Left, and the free-market pleasure of the Right? Other news, quickly: orders for durable goods sparkled in March, the 2.0% gain doubling the forecast. US manufacturing is hot. Goody. Maybe 18% of GDP. Would you like your college grad to work for GM, making stuff, or for Google which makes nothing? Vladimir the Stupid is in a one-man Mexican standoff. Merkel spoke for the first time in weeks, accusing Vladimir of “imposing his will with the barrel of a gun and force of a mob.” Much as Germany would like to be an overlarge and changeless Switzerland, I think Vladimir has underestimated European resistance. The threat of imminent conflict creates a steady bid for US Treasurys. As does deflation in Europe, and an ever-closer endgame in Japan, and above all US housing numbers too painful for many to discuss — and those who have tried have gotten wrong. March sales of new homes, defined as a purchase contract written on a dwelling any time after the building permit, cratered 14.5%. The financial media led by WSJ and Bloomberg say the problem is home prices rising too fast and higher mortgage rates. Housing is too important to the nation for old grudges to distort reporting this way. Stock market types hate housing and its competition for client investment, and delight in finding fault. The real story, one piece at a time: 1. Every US recession recovery since WW II has been propelled by housing, specifically the benefit of rising prices, which continue to rise until the next recession. The price-rise loop is so strongly positive that the next recession follows the Fed forced to lean into housing’s inflationary impact. Rising prices create several beneficial wealth effects: increased equity encourages everything from trade-up to debt payoff to tuition for Egbert. National home prices are today no more than 10% up from an overshot bottom, the rise exaggerated by bulk-buying cash-paying cripple-shooters. 2. Mortgage rates are higher than the brief QE3 period near 3.50% from mid-2012 to mid-2013. However, that was a refi boon — it did not last long enough for the housing stock to re-price accordingly. We sit barely 4.50, under the baseline 2009-2011. More important: in each post-war recovery mortgage rates had to rise a full two percentage points from recession baseline to slow the market. One financial publication says, “The decline in mortgage lending… stemmed almost entirely from the slide in refinancing. Loans for purchases were basically flat.” Two paragraphs later: “Applications for purchase mortgages last week ran nearly 18% below… a year ago.” If you’re going to run propaganda, get it straight. 3. New-home sales provide a minor GDP boost, perhaps 3% of total when running hot. The economic propellant to recession escape is home prices. All hot markets across the US are short of inventory, buyers often in auction conditions. How can a minor rise in prices stall construction drowning in demand? 4. The deepest problem with housing today is reverse-circular. In a normal recovery the drop in mortgage rates unleashes demand. In the aftermath of the Great Recession too many households are damaged, especially those aged under 40. Inferior replacement of jobs, savings run down, credit damaged, flat wages inhibiting savings. 5. All made worse by credit too tight, especially for two classes of new construction at entry-level: condo and mixed-use. We’ll see if we can have an accelerating recovery without housing. Households themselves… since the 1930s the one reliable way for a family to build net worth has been the prudent purchase of a home even with little (FHA) or nothing (VA) down, modest discipline and patience. Remove housing as that vehicle, and young Americans have this option: paycheck savings handed to the stock market.
New data has pushed housing to the forefront of the recovery discussion. Can the economy recover without housing? What has gone wrong with it? If housing is de-emphasized as never since the Depression, what does it mean for inequality, the new darling of the Left, and the free-market pleasure of the Right? Other news, quickly: orders for durable goods sparkled in March, the 2.0% gain doubling the forecast. US manufacturing is hot. Goody. Maybe 18% of GDP. Would you like your college grad to work for GM, making stuff, or for Google which makes nothing? Vladimir the Stupid is in a one-man Mexican standoff. Merkel spoke for the first time in weeks, accusing Vladimir of “imposing his will with the barrel of a gun and force of a mob.” Much as Germany would like to be an overlarge and changeless Switzerland, I think Vladimir has underestimated European resistance. The threat of imminent conflict creates a steady bid for US Treasurys. As does deflation in Europe, and an ever-closer endgame in Japan, and above all US housing numbers too painful for many to discuss — and those who have tried have gotten wrong. March sales of new homes, defined as a purchase contract written on a dwelling any time after the building permit, cratered 14.5%. The financial media led by WSJ and Bloomberg say the problem is home prices rising too fast and higher mortgage rates. Housing is too important to the nation for old grudges to distort reporting this way. Stock market types hate housing and its competition for client investment, and delight in finding fault. The real story, one piece at a time: 1. Every US recession recovery since WW II has been propelled by housing, specifically the benefit of rising prices, which continue to rise until the next recession. The price-rise loop is so strongly positive that the next recession follows the Fed forced to lean into housing’s inflationary impact. Rising prices create several beneficial wealth effects: increased equity encourages everything from trade-up to debt payoff to tuition for Egbert. National home prices are today no more than 10% up from an overshot bottom, the rise exaggerated by bulk-buying cash-paying cripple-shooters. 2. Mortgage rates are higher than the brief QE3 period near 3.50% from mid-2012 to mid-2013. However, that was a refi boon — it did not last long enough for the housing stock to re-price accordingly. We sit barely 4.50, under the baseline 2009-2011. More important: in each post-war recovery mortgage rates had to rise a full two percentage points from recession baseline to slow the market. One financial publication says, “The decline in mortgage lending… stemmed almost entirely from the slide in refinancing. Loans for purchases were basically flat.” Two paragraphs later: “Applications for purchase mortgages last week ran nearly 18% below… a year ago.” If you’re going to run propaganda, get it straight. 3. New-home sales provide a minor GDP boost, perhaps 3% of total when running hot. The economic propellant to recession escape is home prices. All hot markets across the US are short of inventory, buyers often in auction conditions. How can a minor rise in prices stall construction drowning in demand? 4. The deepest problem with housing today is reverse-circular. In a normal recovery the drop in mortgage rates unleashes demand. In the aftermath of the Great Recession too many households are damaged, especially those aged under 40. Inferior replacement of jobs, savings run down, credit damaged, flat wages inhibiting savings. 5. All made worse by credit too tight, especially for two classes of new construction at entry-level: condo and mixed-use. We’ll see if we can have an accelerating recovery without housing. Households themselves… since the 1930s the one reliable way for a family to build net worth has been the prudent purchase of a home even with little (FHA) or nothing (VA) down, modest discipline and patience. Remove housing as that vehicle, and young Americans have this option: paycheck savings handed to the stock market.
Friday, April 18, 2014
Capital Markets
By Louis S. Barnes Friday, April 18th, 2014
Interesting, go-figure week. New economic data were strong but ignored by markets; Chair Yellen made dovish speeches which revived the stock market; and Ukraine back-from-the brink removed a safety bid from bonds. March retail sales and a February revision doubled forecasts, both months up .7% ex-autos. March industrial production likewise rose .7%. Last week’s drop in new claims for unemployment insurance was not a fluke, near 300,000 again, a 2007 level. Bond screens did not flicker on that good news, but they did when Yellen spoke. She identified the three unknowns most important to the Fed: the degree of slack in the labor market, inflation so far below target, and externals which might derail recovery, implying concern for fragility. She emphasized the Fed has been “forced to rely on two less familiar policy tools… forward guidance and large-scale asset purchases.” Then this splendid clarifier of the March meeting: “The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained.” If the economy poops along as-has-been, rates will stay here until doomsday. This Fed is event-dependent, not following a calendar. Then, Vladimir. He will go as far as sanctions will allow; financial markets will not care much unless those sanctions hurt the world economy; and Vladimir will push limits as long as he lasts. “Kharkiv, Luhansk, Donetsk and Odessa weren’t part of Ukraine until last century. These are the territories that were passed to Ukraine in the 1920s by the Soviet government. God knows why they did that.” Vladimir intends to rectify. Back to the Fed. Fed-watching used to be simple in theory: it was either too tight or too loose, the degree of stricture measured by the fed funds rate (reserves traded overnight among banks, a fundamental cost of money). Recently things have gotten complicated. Financial workers must be nearly 30 years old to remember fed funds above zero, an interval without precedent in the Fed’s 101 years. The Fed’s emergency departure from established theory has opened the door to the wrong sort of people, most very well-dressed. It is one thing to question the Fed’s post-Lehman measures, and another to use a confusing situation to grind political axes, and the dull blades of social theory, and to cover for bad performance in investment advice. Outer-right types object to the Fed itself. They have been apoplectic at the Fed’s interference with their trading, and objected to its efforts to prevent a cleansing financial crash. They have been joined by all sorts of market operatives incensed by the Fed’s outright purchases of assets (“quantitative easing”). This week Hoisington Management published Lacy Hunt’s latest quarterly. A respected Fedologist since the ’70s, his remarks have been watched carefully since superb observations 2004-2008, detecting the crisis ahead. I assume in frustration, Hunt has gradually descended into the worst of Fed-bashing, his latest claiming there is no economic wealth effect, and QE has been destructive. A new line of criticism going viral among professionals: the Fed should force Congress and the White House to useful action by refusing to do more itself. As you make your way through new critiques of the Fed, stick with this timeline. The Fed fought the greatest bank run of all time from July 2007 to September 2008 with traditional measures. Upon the collapse of Lehman and dominoes beginning with AIG the Fed guaranteed the entire US financial system and bought assets to thaw frozen markets. The effort worked beautifully, the fundamental crisis over by spring 2009, the White House and Congress peripheral at best, as often counterproductive as not. Basic financial healing was complete by 2010. The economy has failed to recover since because of external global forces hurting us since 1990 (excessive investment and labor combined with predatory trade to produce global deflation), not the financial crisis. Fed critics may make any case they wish, but to have validity they must account for that series of events.
Interesting, go-figure week. New economic data were strong but ignored by markets; Chair Yellen made dovish speeches which revived the stock market; and Ukraine back-from-the brink removed a safety bid from bonds. March retail sales and a February revision doubled forecasts, both months up .7% ex-autos. March industrial production likewise rose .7%. Last week’s drop in new claims for unemployment insurance was not a fluke, near 300,000 again, a 2007 level. Bond screens did not flicker on that good news, but they did when Yellen spoke. She identified the three unknowns most important to the Fed: the degree of slack in the labor market, inflation so far below target, and externals which might derail recovery, implying concern for fragility. She emphasized the Fed has been “forced to rely on two less familiar policy tools… forward guidance and large-scale asset purchases.” Then this splendid clarifier of the March meeting: “The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained.” If the economy poops along as-has-been, rates will stay here until doomsday. This Fed is event-dependent, not following a calendar. Then, Vladimir. He will go as far as sanctions will allow; financial markets will not care much unless those sanctions hurt the world economy; and Vladimir will push limits as long as he lasts. “Kharkiv, Luhansk, Donetsk and Odessa weren’t part of Ukraine until last century. These are the territories that were passed to Ukraine in the 1920s by the Soviet government. God knows why they did that.” Vladimir intends to rectify. Back to the Fed. Fed-watching used to be simple in theory: it was either too tight or too loose, the degree of stricture measured by the fed funds rate (reserves traded overnight among banks, a fundamental cost of money). Recently things have gotten complicated. Financial workers must be nearly 30 years old to remember fed funds above zero, an interval without precedent in the Fed’s 101 years. The Fed’s emergency departure from established theory has opened the door to the wrong sort of people, most very well-dressed. It is one thing to question the Fed’s post-Lehman measures, and another to use a confusing situation to grind political axes, and the dull blades of social theory, and to cover for bad performance in investment advice. Outer-right types object to the Fed itself. They have been apoplectic at the Fed’s interference with their trading, and objected to its efforts to prevent a cleansing financial crash. They have been joined by all sorts of market operatives incensed by the Fed’s outright purchases of assets (“quantitative easing”). This week Hoisington Management published Lacy Hunt’s latest quarterly. A respected Fedologist since the ’70s, his remarks have been watched carefully since superb observations 2004-2008, detecting the crisis ahead. I assume in frustration, Hunt has gradually descended into the worst of Fed-bashing, his latest claiming there is no economic wealth effect, and QE has been destructive. A new line of criticism going viral among professionals: the Fed should force Congress and the White House to useful action by refusing to do more itself. As you make your way through new critiques of the Fed, stick with this timeline. The Fed fought the greatest bank run of all time from July 2007 to September 2008 with traditional measures. Upon the collapse of Lehman and dominoes beginning with AIG the Fed guaranteed the entire US financial system and bought assets to thaw frozen markets. The effort worked beautifully, the fundamental crisis over by spring 2009, the White House and Congress peripheral at best, as often counterproductive as not. Basic financial healing was complete by 2010. The economy has failed to recover since because of external global forces hurting us since 1990 (excessive investment and labor combined with predatory trade to produce global deflation), not the financial crisis. Fed critics may make any case they wish, but to have validity they must account for that series of events.
Friday, April 11, 2014
Capital Markets
By Louis S. Barnes Friday, April 11th, 2014
Events this week could be mistaken for a cartoon if not so serious. And the cartoonish aspect magnified by clowns squirting lapel flowers in your eye every time something starts to make sense.
Events this week could be mistaken for a cartoon if not so serious. And the cartoonish aspect magnified by clowns squirting lapel flowers in your eye every time something starts to make sense.
The setup this week was for higher interest rates. This was an “auction week” for the Treasury, hawking $64 billion in new long-term paper. Ever since the deficit began to balloon in 1980, one of the easiest bets on the Street has been rates pushed up by Treasury selling. And Thursday’s news: claims for unemployment insurance last week free-fell by 32,000 to 300,000, a seven-year low. In previous expansion cycles a drop like that was enough to trigger an immediate rate hike by the Fed.
In perfect irrationality long-term rates fell within an inch of the 2014 low.
Most financial media say that rates have fallen because stocks have. There is some truth in that but not enough to matter. We live in a post-Copernican world: the sun does not revolve around the Earth, nor does the Earth orbit the stock market.
In the actual universe both markets are moving in response to the same external forces: the global economy is softening, the US is not accelerating and is unable to pull the rest, the whole shebang feeling the drag of deflation gravity, and the Fed alone among central banks is talking about tightening.
Enter clowns. The Fed’s post-meeting statement on March 19 included a chart of the governors’ and regional presidents’ forecast of the future Fed funds rate, “0%-.25%” since 2008. To considerable surprise in the markets the Fed seemed to pre-announce hikes next year to at least 1.00% and in 2016 to 2.00% or more — so surprising that markets withheld judgment. Good thing: the minutes of the meeting released on Wednesday cast Janet Yellen as Gilda Radner doing Emily Litella: “Nevermind.”
Market clowns want a transparent Fed. Every time the Fed tries for more transparency it wishes it hadn’t. The Fed is caught in a partially traditional predicament: it still needs to aid a fragile recovery unworthy of the name, but avoid creating new bubbles along the way and warn that if recovery gathers steam, then it will take away the punch bowl. The Fed funds forecast was entirely dependent on labor market acceleration not yet in evidence. Better to shut up than to sound like Donald Rumsfeld mulling known unknown known unknowns.
The Fed is stopping QE3 as fast as it can. It accomplished little, if anything, and there may be a case — may — that it contributed to an overbought stock market. The Fed is supposed to “take away the punch bowl just when the party gets going,” but Chair Yellen is correct that there is no party. To raise the Fed funds rate in these conditions would be trying to pull the tablecloth out from under the place-settings.
Housing is very close to stalling right now. Mortgage rates often do not rise tick-for-tick with the Fed, but they will this time. Tom Lawler finds the rate of home-ownership in collapse, at 63.3% lower than officially measured — and the lowest since 1965 and falling. The mania for asbestos banking wrapped tighter this week with the imposition of the first-ever-anywhere total-leverage requirement: 5% capital for all assets even if cash. Credit, or fireproof? Not both.
A strong catalyst for falling stocks and rates: China’s imports and exports both are sliding, and top officials began to break the news that its GDP would fail the reduced 7.5% target growth. Its yuan devaluation, like the yen, exports deflation.
The ECB continues to rattle an empty scabbard, threatening helpful stimulus five years too late. Half of Europe is in outright deflation. Marker: 5-year bonds of Italy and Spain have the same yields as ours. The deflation threat cancels their credit weakness.
Last clowns: striking a blow against sexism, the White House gave Kathleen Sebelius a last cigarette and led her to the bullet-pocked wall in the Rose Garden. Although the White House called all the ObamaCare shots, she got the blindfold. Her replacement, Sylvia Burwell, is very able (if on the all-southpaw team) and we might at least get some real numbers on ObamaCare revenue and expense.
Friday, April 4, 2014
Capital Markets
By Louis S. Barnes Friday, April 4th, 2014
To the silent consternation of markets, today’s report of March payrolls arrived exactly as expected, a gain of 192,000. Zounds. Since this report has never before come in as forecast, no one knows what to make of it.
To the silent consternation of markets, today’s report of March payrolls arrived exactly as expected, a gain of 192,000. Zounds. Since this report has never before come in as forecast, no one knows what to make of it.
On our son’s third birthday, the young man held court in his highchair while fiddling with his spaghetti and simultaneously kicking one foot up and down, over and over. Suddenly that shoe flew off, did perfect somersaults above his head and landed flat on his tray beside his plate. He remained deadpan, eyes in steady contact with the video camera, as though “Oh, happens all the time.”
Thus today bonds and stocks sit in stunned paralysis pretending all of this makes sense. The twin ISM surveys for March: manufacturing from 53.2 to 53.7, and service sector from 51.6 to 53.1. So much for the better-weather surge. Wages are still stuck on a 0% annual slope after inflation. Auto sales are up 7.3% year-over-year, more than triple nominal wage growth, indicating our fondness for cars and the massive return of subprime lending. Want a car, you get a car.
Overseas… the ECB is jawboning a massive stimulus which will not be; reforms are slowing China more than it can officially report; and Japan increased its consumption tax from 5% to 8%, the next step in its inventive disaster. No wonder money continues to flow to US bonds.
The monthly payroll and unemployment reports, together with weekly news of new claims for unemployment insurance have defined Fed policy and turns in long-term rates since I was the age of my son’s shoe trick (1952). Absolutely axiomatic: when unemployment falls far enough, employers will begin to compete for workers by paying higher wages. Since the Fed is always behind the information curve, its mission has been to snug-up policy as soon as the labor market tightens, thus pre-empting inflation pressure. That way the Fed can prolong an expansion phase by preventing premature overheating (and despite jackdaws of both left and right wing, the Fed has done well by any comparison to pre-Fed days).
Today that axiom is in doubt. Everybody gets the concept that the unemployment rate no longer reflects conditions in the labor market. It is painfully clear that too many people have left and are still leaving the labor force, and that even a decline to the mid-6s in rate has done nothing for wages. Weekly claims for unemployment insurance have been normalized for almost two years at or below 350,000.
One large and surly group still blames the victim: the job market is poor because of obsolete or missing skills in the US workforce. However, the longer we go without acceleration in the overall economy, the harder to defend dogma.
If it is different this time — if electronically greased global commerce is leveling wages — then the current pattern makes perfect sense. No matter how scarce US labor becomes, global employment will flow elsewhere, not to higher wages here. Old dogmatics point to unfilled jobs requiring specialized skills. It is different this time: even if employers bid up the wages for the super-productive, there are too few of these positions to move the inflation needle. Only so may cardiac surgeons, robot programmers and mechanics, and dreamer-uppers of new apps….
A different economy should mean different public-policy response. Chair Yellen gets it, but neither party has a clue, both re-fighting old wars. We have spent and borrowed our way into a fiscal box, and have already shrunken a lot of government spending.
State the problem: we must help Americans of all ages to acquire global-competitive skills and attitude, and without make-work, and without ruinous student debt. One government-shrinking opportunity: relax the over-reaction to the credit bubble. New evidence of Japan-style wounds: in the last six years ownership of homes among those aged 35-44 has fallen 6.3 points to 60.9%, and among those under 35 down 4.2 points to 36.8%. Meanwhile, of those 45-54, 71.3%, and 55-64 77%. Sacrifice youth on the altar of panic, and pay a very high price.
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