Tuesday, December 11, 2018

It’s the Third Largest Housing Boom Ever!

The Mortgage Corner

The 10-year Treasury bond yield has fallen back to 2.86 percent, which is usually recession territory. And the 30-year conforming fixed rate is 4.125 percent again with a 1-point origination fee. This is unheard of in a fully employed economy currently growing at 3 percent. Longer term rates should be rising at such a time, not falling, as I said last week.

Then are we approaching recession territory? Nobel laureate Robert Shiller, perhaps the most informed behavioral economist following the housing market, has just opined that we are in the third largest housing boom, ever. He won last year’s Nobel Prize in the Economic Sciences because he has taken the trouble to understand Americans’ financial behavior in the housing market.

Only two other housing booms—the housing bubble preceding the Great Recession and that in post WWII 1940’s—lasted longer. Existing-home prices have risen 53 percent since 2012, 40 percent after inflation is factored in, said Professor Shiller.
“Since February 2012, when the price declines associated with the last financial crisis ended, prices for existing homes in the United States have been rising steadily and enormously. According to the S&P/CoreLogic/Case-Shiller National Home Price Index (which I helped to create) as of September, the prices were 53 percent higher than they were at the bottom of the market in 2012.”
It’s possible we are at the top of this housing boom, which means at the top of this business cycle, as well, since the financial markets usually follow where housing goes. Housing prices and housing demand are forward-looking indicators, in other words, because home buyers are sensitive to inflation and interest rate trends.

Actually, Professor Shiller maintains most investors are fairly lazy in their research of investments, including housing purchases, which is why we have housing bubbles. That’s because investors tend to listen to good stories or word-of-mouth opinions by others they may or may not trust, rather than do their own research that might tell them the innate value of an investment in greater depth.

Such ‘irrational exuberance’ caused the last housing bubble because homebuyers believed the conventional story that home prices would never decline; and they hadn’t since World War Two.

That’s why homebuyers pushed up housing prices as much as 20 percent per year before the bubble burst in 2018, and housing prices declined for the first time since World War Two!

Dr.Shiller goes through all the possibilities for the current housing boom, including good economic times and the low jobless rate, but I vote for the simplest explanation— low interest rates.

It’s true 30-year conforming fixed mortgage rates were even lower last year at this time; as low as 3.50 percent; but the Fed is no longer buying mortgage-backed securities with their QE program.
They are now selling a portion of their $4 trillion portfolio. This should boost mortgages and other longer term fixed yields; but that isn’t happening as investors prefer to snap up more secure sovereign debt insured by the ‘faith and credit’ of the U.S. government.

Then do we have a housing bubble today? Not yet, as there are far too few homes being built at present. Builders are playing catchup to the lingering results of the Great Recession—too many low-paying jobs, too strict qualification standards by conforming lenders that sell to Fannie Mae and Freddie Mac (those entities still owned by the federal government), and cities that don’t want more homes built in their own backyard.

Harlan Green © 2018

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Monday, December 10, 2018

Trade Wars Hurt US the Most!

Popular Economics Weekly

Is the trade war hurting U.S. jobs? Yes, says Mauldin Economics’ Patrick Watson, among others. Watson uses US automakers as an example. Ford and GM estimate that the 25 percent steel and 10 percent aluminum tariffs will add $1 billion to their production costs just next year. What happens when they sell more vehicles overseas with such rising production costs?
“For GM and other auto manufacturers, the customers are increasingly foreign. In this year’s third quarter, GM sold 835,934 cars in China and 694,638 in the U.S. It built many of those directly in China and has every reason to make more there, with tariffs or not,” said Watson
General Motors is poised to end production at five plants in the U.S. and Canada, kill off several passenger cars – including the Chevrolet Impala – and slash 15 percent of its salaried workforce in a sweeping cost-cutting plan designed to boost profits and adjust to America's changing tastes in vehicles.

Is globalization reversing itself? The recent rise in US Labor Productivity highlights the growing use of robots and other productivity-enhancing technologies American companies are investing in due, in part, to the 3.7 percent unemployment rate and resultant dearth of skilled workers. But there are other reasons

Robots level product costs, since they cost as much in China as in the US, which means China will produce more domestically to avoid rising tariffs, and so needs to import less from others, including the U.S.

 The U.S. Bureau of Labor Statistics just reported nonfarm business sector labor productivity increased 2.3 percent during the third quarter of 2018, as output increased 4.1 percent and hours worked increased 1.8 percent. Declining unit labor costs over the past 12 months are the reason productivity has increased at the same time as output. It is down to 0.9 percent for a 3 tenths decline from the first estimate. This reflects a 4 tenths downgrade in compensation to a growth rate of 3.1 percent.

This should also mean U.S. workers’ wages are rising, but the trade wars are in fact driving many of the better paying manufacturing jobs overseas. Robots are shortening the supply chain, in other words, which will only hasten the decline in the need for foreign products.

And we are already seeing the result of the tariff increases on Chinese goods; a surging trade deficit. The trade deficit rose in October to a 10-year high amid a record shortfall with China (due to drop in soybean purchases), keeping the U.S. on pace to record the largest annual gap in a decade, reports the U.S. Bureau of Economic Analysis.

The deficit edged up 1.7 percent to $55.5 billion from a revised $54.6 billion in September. That’s the biggest shortfall since October 2008, and ironically, it stems in part from tariffs imposed by President Trump in an effort to reduce the deficit.

We know part of the recent surge in imports reflects American companies stocking up on Chinese goods ahead of the holidays to get ahead of another increase in U.S. tariffs that were supposed to kick in on Jan. 1. But the U.S. tariff increase has been temporarily been postponed until March, per agreement with China at the recent G20 summit in Argentina.

Even the 90-day postponement is not helping the stock market, since nothing concrete was agreed on at the G20 meeting.  But it is pushing interest rates lower, to levels not seen since the Great Recession.  This will help consumer spending, but only if the Fed doesn’t raise their short-term rates further.

Harlan Green © 2018

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Saturday, December 8, 2018

Weaker Employment Report Due to Higher Tariffs?

Financial FAQs

Total nonfarm payroll employment increased by 155,000 in November, and the unemployment rate remained unchanged at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in manufacturing, and in transportation and warehousing.

The slightly weaker report showed little inflation that might keep the Fed from raising interest rates further in their December FOMC meeting. The Federal Reserve may not want to push rates higher because of the ongoing trade wars that threaten jobs and growth next year. This was brought out in the wild stock market gyrations of late. The DOW down plunged more than 1,000 points this week, erasing all its gains for the year, in part due to fears of upcoming layoffs due to the rising tariff costs.

Average hourly earnings increased just 0.2 percent, which was on the low side of expectations. The year-on-year rate for earnings held unchanged at 3.1 percent, again on the low side of expectations, which should keep the retail (CPI) inflation rate in the 2 percent range.

Another sign of moderation comes from average weekly hours which, at 34.4, are at the low end of expectations. Manufacturing hours and overtime are steady, which with the 27,000 jobs created show moderate results for the upcoming industrial production report.

Overall manufacturing activity as detailed in the November ISM Manufacturing Index was extremely strong with new orders, at 62.1, up 4.7 points, back over 60 in one of the longest runs in the long history of this report that it had held for a year-and-half. This may not continue if the steel and aluminum tariffs, however, are not eventually eased that are a large part of manufacturing costs.

The number of long-term unemployed (those jobless for 27 weeks or more) declined to 62.9 percent, and the employment-population by 120,000 to 1.3 million in November. These individuals accounted for 20.8 percent of the unemployed.

Both the labor force participation rate, at 62.9 percent, and the employment-population ratio, at 60.6 percent, were unchanged in November, said the BLS. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 4.8 million, changed little in November. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.

The report wasn’t strong enough to prevent expectations of further economic uncertainty amid the ongoing trade war with China, in particular, that has been given a 90-day reprieve at the G20 economic summit. The so-called reprieve did nothing for the existing tariffs in steel and aluminum initiated by Trump and agricultural tariffs enacted by China in response, which are boosting costs for both manufacturers and consumers.

Are we about to enter another recession, the sixth recession in two decades? Five have occurred since 1981, including the Great Recession. Two were during Ronald Reagan’s Presidency (1981, 1983), one under GHW Bush (1991), and two under GW Bush (2001, 2007). All have occurred under Republican administrations, in other words, administrations noted for cutting taxes, but not spending. Are we seeing a pattern?

The Trump administration is trying the opposite tack. It has cut taxes, but erected higher trade barriers. The results are already clear. General Motors just announced it is poised to end production at five plants in the U.S. and Canada, kill off several passenger cars – including the Chevrolet Impala – and slash 15 percent of its salaried workforce in a sweeping cost-cutting plan designed to boost profits and adjust to America's changing tastes in vehicles, as I mentioned last week.

The move — part of a sweeping cost-cutting plan unveiled Monday — comes as Americans are abandoning passenger cars in favor of crossovers, SUVs and pickups, said USA Today. But the underlying reason is that GM and Ford announced the 25 percent boost in steel tariffs, and 10 percent boost in aluminum tariffs enacted by the Trump administration will cost each an extra $1 billion in production costs next year.

Higher tariffs will not bring more jobs home—especially those higher-paying manufacturing jobs we were promised—if those tariffs aren’t eventually removed.

Harlan Green © 2018

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Wednesday, December 5, 2018

Global Warming too Hot to Ignore

Answering the Kennedys Call to Action

The impacts of climate change are already being felt in communities across the country. More frequent and intense extreme weather and climate-related events, as well as changes in average climate conditions, are expected to continue to damage infrastructure, ecosystems, and social systems that provide essential benefits to communities, according to the just released U.S. Fourth National Climate Assessment..

Future climate change is expected to further disrupt many areas of life, exacerbating existing challenges to prosperity posed by aging and deteriorating infrastructure, stressed ecosystems, and economic inequality, said the study.
“Impacts within and across regions will not be distributed equally. People who are already vulnerable, including lower-income and other marginalized communities, have lower capacity to prepare for and cope with extreme weather and climate-related events and are expected to experience greater impacts.”
It is people that are most affected by climate change—global warming in particular that can result in massive population shifts away from rising waters, drought-affected areas with lack of water and the increased danger of wildfires—and so its effect on communities leads off the study results, especially in the western states with their prolonged droughts.

“Climate change has led to an increase in the area burned by wildfire in the western United States,” said an Atlantic Monthly summary of the report. “Analyses estimate that the area burned by wildfire from 1984 to 2015 was twice what would have burned had climate change not occurred. Furthermore, the area burned from 1916 to 2003 was more closely related to climate factors than to fire suppression, local fire management, or other non-climate factors.”

California in particular has been affected by heat waves this year and the prolonged six-year drought leading to the worst wildfires in California history. The just extinguished Paradise Camp Fire destroyed 18,793 structures and 85 lives lost to date, with several hundred residents still missing.

The last prolonged U.S. dry spell was the 1930’s Dustbowl during the Great Depression. It only compounded the economic damage with the loss of farmland and mass migration of dustbowl families immortalized in John Steinbeck’s Grapes of Wrath.

And economic damage will be horrendous if nothing is done to mitigate the damage from a hotter planet and coastal areas subject to greater flooding.

The report says shoreline counties hold 49.4 million housing units, while homes and businesses worth at least $1.4 trillion sit within about 1/8th mile of the coast. Flooding from rising sea levels and storms is likely to destroy, or make unsuitable for use, billions of dollars of property by the middle of this century, with the Atlantic and Gulf coasts facing greater-than-average risk compared to other regions of the country …

Damage could be as much as $3.6 trillion in properties and value loss of no mitigation measures are taken, but $820 billion “where cost-effective adaptation measures are implemented.”

Climate change is becoming a topic too hot to ignore; even by the science-deniers who prefer to protect their pocketbooks rather than America’s communities and country.

Harlan Green © 2018

Tuesday, December 4, 2018

Credit Alert—Interest Rates About to Invert

The Mortgage Corner

The spread between the 2-year note and the 10-year narrowed 4 basis points to 0.16 percentage point on Monday, its flattest levels since July 2007, according to MarketWatch. The 10-year Treasury yield dropped back below 3 percent, to 2.93 percent for the first time in one year, lowering mortgage rates as well.

This is unheard of in a fully employed economy currently growing at 3 percent.  Longer term rates should be rising, if there was a rising demand for longer term credit transactions, such a mortgages. So it’s a danger signal that all may not be well in the financial markets. There is the perception, at least, that worldwide growth is slowing. The stock market has become increasingly jittery with huge moves daily, trade wars are in full bloom, and Russia (Ukraine) and North Korea (new missile sites) are acting up again.

Hence investors would rather hold US bonds than stocks at the moment.

A major reason for slower worldwide growth could also be the shrinking volume of US dollars in circulation. The Federal Reserve has been selling its $4 trillion hoard of securities back into the private sector that was part of its Quantitative Easing program, thus reducing the amount of US dollars in circulation. This is while it is still the world’s reserve currency that is used in a majority of cross-border transactions.

The current Federal Reserve is another culprit for the inverted curve because it is pushing short term rates higher than is necessary. Its benchmark overnight rate has risen to 2.25 percent, its eighth raise since 2015, and now 2 percent above its post-recession lows, thus increasing the cost of consumer borrowing. Yet inflation is barely rising, which should be a reason not to raise rates, since it is another indication that a majority of consumers aren’t flush with cash. Not when the median income of households has barely budged since the 1980s, after inflation.

There is just not enough demand for goods and services, in other words, which is why inflation is tame. Then what’s causing the economic growth? Corporate profits are at record levels, and automation is speeding up labor productivity. So more is produced, but the income stream doesn’t trickle down to the majority of consumers in what has become a lower-paying service economy of mainly warehouse, restaurant (part of leisure and hospitality sector), healthcare, and retail workers that don’t earn enough money to warrant the Fed’s push for higher short term rates in anticipation that inflation may someday loom on the horizon.

But inflation ain’t happening, and doesn’t look like it will happen soon, unless what trickles down becomes a real income stream for the middle and lower income earners. There has to be greater access to jobs with fair pay, decent shelter, effective schools, and reliable health care, for starters.

Harlan Green © 2018

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Monday, December 3, 2018

Q3 Economic Growth Still Strong

Financial FAQs

Q3 real GDP growth was up 3.5 percent, according to the U.S. government Bureau of Economic Analysis. “With this second estimate for the third quarter, the general picture of economic growth remains the same; upward revisions to nonresidential fixed investment and private inventory investment were offset by downward revisions to personal consumption expenditures (PCE) and state and local government spending,” said the BEA.

Consumer spending is up 3.6 percent, and there is virtually no inflation. Prices are rising 1.7 percent annually per the GDP price deflator that measures the prices of all final goods and services produced domestically.


Soaring corporate profits weren’t a big help to growth, however, as most of the profits are being spent on stock buybacks, though there was a slight increase of capital expenditures. Investment in equipment climbed 3.5 percent vs. virtually no increase in the preliminary estimate.

And spending on structures such as office buildings and drilling rigs fell 1.7 percent instead of -8 percent in the first estimate. Profits were up 19.4 percent after taxes, and tax payments fell 32.9 percent from last year. Corporates profits are therefore up 10.3 percent in a year, the best showing since 2012.

We also now have the Fourth National Climate Assessment, which is much more accurate than the previous reports from 13 federal agencies in pinning down the damage to economic growth. If nothing is done to mitigate its effects on coastal cities’ flooding from rising sea levels, increasing wildfires in drought-stricken regions, and the increasing frequency and ferocity of hurricanes and tornadoes, economic growth will suffer substantially.
“In the absence of significant global mitigation action and regional adaptation efforts, rising temperatures, sea level rise, and changes in extreme events are expected to increasingly disrupt and damage critical infrastructure and property, labor productivity, and the vitality of our communities.”
Need we say more about ignoring physical reality in all its forms? Profits must be invested where they will do the most good. If corporations won’t heed the looming threats to not only the environment but livelihoods as well, then government will find a more beneficial use for the $trillions being hoarded in the private sector.

Harlan Green © 2018

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Thursday, November 29, 2018

Beware the Shrinking US Dollar!

Popular Economics Weekly


Barron’s Magazine reported that the Fed is shrinking credit too quickly, and it will slow not only U.S. economic growth, but growth in the rest of the world as well. Why? Because the U.S. Dollar is the world’s main reserve currency that covers more than 60 percent of world trade.

And since the Fed is taking circulating $$ out of the economy by selling some of those $4 trillion in securities it has been holding since Fed Chair Ben Bernanke’s term--$50 billion per month—it is reducing the amount of dollars in circulation, leaving fewer dollars to pay for transactions via the world’s banks and clearing houses.

Over the four-week period from October 3 through October 31, reports Wolf Street, the Federal Reserve shed $35 billion in assets, according to the Fed’s weekly balance sheet released last Thursday afternoon. This brought the balance sheet to $4,140 billion, the lowest since February 12, 2014. Since October 2017, when the Fed began its QE unwind, or “balance sheet normalization,” it has now shed $321 billion:

And that could mean that China’s Yuan (Renminbi) and the euro would begin to replace it as reserve currencies, meaning that fewer transactions would flow through US banks and economy. This also means the US then has less control over trade rules, and yes, sanctions it wants to impose on other countries, like Iran. This is because other countries don’t like economic bullying that isn’t in their best interests, and will seek to use other currencies, such as the euro in place of the dollar.

The dollar leads all other currencies in supplying the functions of money for international transactions. It is still the most important unit of account (or unit of invoicing) for international trade. It is the main medium of exchange for settling international transactions. It is also the principal store of value for the world’s central banks, said a recent Bank of England Quarterly Bulletin.

But what can happen next, as worldwide growth slows, which is sure to happen as dollar reserves and credit shrink?? Trump’s trade war is happening at a very bad time. Economist and Project Syndicate columnist Jeffery Sachs has outlined the possibilities of trade policies that harm, rather than help economic growth.
“The most consequential and ill-conceived of Trump’s international economic policies are the growing trade war with China and the re-imposition of sanctions vis-à-vis Iran. The trade war is a ham-fisted and nearly incoherent attempt by the Trump administration to stall China’s economic ascent by trying to stifle the country’s exports and access to Western technology. But while U.S. tariffs and non-tariff trade barriers may dent China’s growth in the short term, they will not decisively change its long-term upward trajectory.
“More likely, they will bolster China’s determination to escape from its continued partial dependency on U.S. finances and trade, and lead the Chinese authorities to double down on a military build-up, heavy investments in cutting-edge technologies, and the creation of a yuan-based global payments system as an alternative to the dollar system.”
This is hardly making US safer, in a world that has outgrown dependence on US economic and geopolitical power. The US currently produces around 22 percent of world output measured at market prices, and around 15 percent in purchasing-power-parity terms (i.e., actual volume). Yet the dollar accounts for half or more of cross-border invoicing, reserves, settlements, liquidity, and funding.

We could be punching above our weight, as the saying goes, if we continue to bully our economic allies, as well as our adversaries. There are now other Heavyweights in the ring.  

Harlan Green © 2018

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