Monday, August 19, 2019

United We Stand, Divided We Fall

Answering the Kennedys’ Call

The day after last Thursday’s DOW Index plunged 800 points, President Trump Tweeted a request that Israel’s Prime Minister Netanyahu block Congresswomen Ilhan Omer and Rashida Tlaib’s visit to Israel and the West Bank.

His action was more than an attempt to distract from economic policies that might be adversely affecting the financial markets. It was just his latest attempt to promote a fear of dark-skinned immigrants, in order to divide and conquer real or imagined adversaries.

He wanted to stir up as much anti-Islamic sentiment as possible by painting them as the face of the Democratic Party, and Republicans the supporter of Israel, when both political parties staunchly support Israel, the only Democracy in the Middle East.

He is following the precedents of autocratic rulers everywhere that attempt to weaken those that oppose their autocratic behavior. But the United States was founded on the principle that we are equal, regardless of race or creed (though not always in practice).
Patrick Henry, the Revolutionary War patriot, was an early supporter of the United States as a delegate to the Confederate Congresses, though not the Constitutional Convention. His last public speech given in March 1799 said, "Let us trust God, and our better judgment to set us right hereafter. United we stand, divided we fall. Let us not split into factions which must destroy that union upon which our existence hangs."
The actual proverb, United we stand, divided we fall, is said to originate from an Aesop’s fable of a lion stalking oxen for his dinner, who realize they are only safe by herding together.

England was the predator ‘lion’ at the time that Patrick Henry believed could only be successfully opposed by a United States of America. Modern nations have avoided major conflicts and been kept safe by the same credo since WWII because they were united by alliances.

Any predator—whether a person or country—can only succeed in weakening the U.S. by exacerbating our divisions, whether between Red and Blue states, or white and dark races, or the rich and poor.

And we now have a predator in our White House that wants to instill the fear of immigrants to divide us.

But we can take comfort in what results from predatory behavior. Autocrats seldom last long in the modern world because they lack the one major element in human behavior that has evolved to create modern civilizations—empathy, or the understanding of others that comes from the realization we are all in this together.

Autocracies are considered pariahs by a civilized world, says Stephen Pinker in The Better Angels of Our Nature—Why Violence Has Declined.

In spite of modern populist movements that oppose the migration of darker-skinned populations to more prosperous (light-skinned) countries, the number of democratic countries has risen sharply to more than 90, while the number of autocracies has declined to just 10 in countries with more than 500,000 in population, cites Pinker from a 2009 Marshall & Cole study.

There is a good reason for the growth of modern democracies, continues Dr. Pinker. “Not only are democracies free of despots, but they are richer, healthier, better educated, and more open to international trade and international organizations.”

Democracies make their citizens more prosperous by inducing them to cooperate peacefully rather than quarrel among themselves. Patrick Henry’s cry, United We Stand, Divided We Fall, was a plea to oppose any behavior that threatens to weaken the United States of America—whether it is by fomenting trade wars, or culture wars.

Harlan Green © 2019

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Wednesday, August 14, 2019

How Low Can Interest Rates Go?

Popular Economics Weekly


 Why are interest rates so low—not just in the US? It’s been below 0 percent in the northern EU countries and Japan for years because there is little worldwide inflation, which means there’s not sufficient demand for the things people and businesses buy that would boost inflation and interest rates higher.

The housing market is usually an infallible indicator of inflation trends. The S&P Case-Shiller Home Price Index, for instance, shows housing prices rising 3.4 percent annually in May, when it was rising at 5 percent over the past several years. It’s a 3-month average of same-home sales that smooths out some of the bumps due to the difficulties in collecting national sales data that always qualify the price estimates with + or – double figure brackets.

The above Case-Shiller graph highlights the percentage changes. Its huge dip occurred during the Great Recession that busted the housing bubble. Its highest point since then was in 2014, and it began to dip below 5 percent in early 2018.

There’s not much the Central Banks can do about the falling interest rates, since they are already so low. They equivocate as much as the financial markets, which tells us things could get worse. The stock market is swinging wildly as more investors flee to save haven investments like bonds, which drives down interest rates further.

For one thing, JP Morgan says a recession could occur in 9 months if Trump can’t resolve the China trade war soon (Hong Kong unrest, for starters?). And economists are beginning to conjecture that if the inverted yield curve—with 1.65 percent 10-yr Treasury yield below the 2-2.5 percent fed funds rate and 2-year bond yields—remains inverted for too long, 1) banks could cut back their lending sharply, tightening credit markets, and 2) investor confidence will fall as more flee from stocks to bonds, while corporations cut back on capex spending due to future uncertainty.

It certainly looks like housing prices might continue to decline, in spite of still record-low mortgage rates, and even though mostly higher-priced homes are being built these days.

The conforming 30-year fixed mortgage rate has now fallen to 3.25 percent, the lowest I’ve seen it in my 30+ years as a Mortgage Banker, though the Prime rate on which most installment and credit card rates are based is at 5.25 percent. Prime dropped 0.25 percent in concert with the last week’s 0.25 percent Federal Reserve rate reduction, but stay tuned on further Prime rate drops, if consumers cut back on their spending.

Consumers might continue to spend for the rest of this year if consumer sentiment holds up, because the job market is still expanding. The latest JOLTS report (Job Openings and Labor Turnover Survey) says there were 1.65 million more job openings (7.35 million) than the 5.7 million new hires in July.

Why do I see interest rates, and inflation declining further? There’s a worldwide decline in foreign trade that totaled $17.7 trillion in 2017, on which most economies depend. And tariffs will become more reciprocal as other countries retaliate with their own import tariffs. It should be obvious to all by now that tariffs are really a tax on imports, and financial markets know this.

So the financial markets are telling us this isn’t the right time to raise taxes.

Harlan Green © 2019

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Tuesday, August 6, 2019

Trade Protectionism = Recession?

Popular Economics Weekly

BEIJING (AP) — China’s government has threatened unspecified “necessary countermeasures” if Trump’s planned tariff hike goes ahead said the AP. And it followed up the threat by devaluing their Yuan by more than 7 percent against the dollar, say news reports.

President Trump Thursday had suddenly tweeted that he would levy a 10 percent tariff on $300 million of Chinese imports last week, after what he perceived to be Chinese backtracking on their good faith efforts to negotiate. It completely unsettled financial markets, causing the DOW to plunge more than 600 points Friday and almost 1,000 points today from a rally spurred by the Federal Reserve rate cut on Wednesday, and today’s counterpunch by the Chinese—though some commentators remarked that investors should have seen it coming.

The beefed-up tariffs on Chinese imports add to an existing 25 percent tax Trump has already placed on Chinese goods. As the New York Times notes, the United States is now “taxing nearly everything China sends to the United States, from iPhones to New Balance sneakers to children’s books.”

Republicans and Trump seem to have a bad case of historical amnesia. Historians generally agree it was the Smoot-Hawley Tariff Act of 1930 that helped to precipitate the Great Depression. The US lost some 50 percent of its foreign trade as a result. Other governments reciprocated with higher tariffs, just as the China is doing with Midwest farmers, and now devaluation that makes their exports cheaper. They are also threatening to ban the export of rare earth minerals used in high-tech manufacturing components, of which China is the world’s major supplier.

China’s Commerce Ministry said Trump’s announcement is a violation of his agreement with President Xi Jinping in June to revive negotiations aimed at ending their fight over Beijing’s trade surplus and technology ambitions. The ministry had earlier said if the U.S. measures took effect, “China will have to take necessary countermeasures to resolutely defend its core interests.”

What is really happening between the lines? One Chinese minister posited that China had slowed negotiations for any meaningful trade agreement to a crawl until after the 2020 election, when it will know with more certainty who to deal with over the longer term.

Whereas President Trump sudden announcement must mean he is trying to divert media attention away from his other problems. To name a few: Trump hadn’t vetted Republican Congressman Daniel Radcliffe, who had to withdraw from consideration for the CIA Chief after it was obvious he wasn’t’ qualified for the job; Senate Majority Leader “Moscow Mitch” McConnell is drawing fire from all sides for refusing to allow a Senate bill to come to the floor that protects upcoming elections from foreign interference; and lastly, all signs are pointing to a gradually slowing economy precisely because of the ongoing trade war.

It is not a pretty picture, but empty bluster and posturing rarely is. We now have the makings of a currency devaluation war, says former Fed Vice Chair Alan Blinder, when other countries may now want to also devaluate their currencies. Such a result could lead to plummeting commodity prices worldwide, and what else…?

The Chinese know the clock is ticking on the Trump administration and Republicans who continue to blindly support him, when congress is by law the real maker or breaker of trade agreements. Who will step up that actually knows the “Art of the Deal?”

Harlan Green © 2019

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Thursday, August 1, 2019

What Happened to Main Street—Part II?

Popular Economics Weekly

Corporate responsibility is back in the air with a vengeance; not only from Senators Elizabeth Warren and Bernie Sanders who constantly remind us on the campaign trail that corporate misbehavior has tilted the “playing field” of economic benefits too much in corporations’ favor.

Now Jamie Gamble, a former corporate attorney, has touched the third rail of corporate behavior—business ethics. He has written an as yet unpublished essay that asserts corporate executives “are legally obligated to act like sociopaths,” according to Andrew Sorkin of the New York Times.
“The corporate entity is obligated to care only about itself and to define what is good as what makes it more money,” Gamble is quoted as saying in his essay. “Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.”
I call it the third rail because it’s a topic that comes up for discussion only when a crisis is brewing, or an election, though economic futurists like Hazel Henderson have been writing about the need to train business executives on higher business ethics for decades in books like, Building a Win-Win World, (Berrett-Koehler, 1996).
“When I published “Should Business Solve Societies' Problems? In the Harvard Business Review in 1968,” said Henderson, “there were few MBA courses on business ethics. By 1995 such courses were standard and often compulsory.”
Ethical behavior leads to what she calls “win-win” corporate behavior, defined as cooperative outcomes that benefit not just corporate executives and their shareholders as happened with the recent Republican tax cuts.

Simply put, such sociopathic behavior benefits just the few with its pre-occupation with maximizing quarterly profits, rather than benefiting the employees and market customers it also services, while adding to the ‘hidden’ public costs of maintaining a clean environment and public infrastructure that it depends on.

These are what are termed the social costs of doing business that Senator Elizabeth Warren intoned in her first campaign to become a Massachusetts Senator:
“You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
 “Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”
In fact, Jamie Gamble has formulated a list of ethical rules he wants corporation executives and shareholders to adopt, and be liable for if they are not adhered to.  They should include:
· Their “relationship with their employees.”
· With “their communities in which they produce and sell.”
· Their “relationships with customers.”
· Their “effects on the environment.”
· And “effects on future generations.”
It is not surprising that Gamble’s ethical rules also meet the definition of sustainable economic growth, which is growth for the long term that benefits more than the few, because it is the “win-win” path that maintains stronger, lasting economic growth with fewer down cycles and economic crises that have wreaked so much economic and social damage in recent decades.

Harlan Green © 2019

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Saturday, July 27, 2019

Economic Growth is Slowing

Financial FAQs

Gross domestic product, the official report card on the economy, grew at a 2.1 percent annual pace from the start of April to the end of June, the government said Friday. GDP slowed from a 3.1 percent gain in the first three months of the year.

American consumers don’t seem to care about signs of slowing growth in manufacturing and housing, as most can find good jobs and rising wages in the service sector of the economy, and they are flush with cash. The BEA reports disposable personal income increased $193.4 billion, or 4.9 percent, in the second quarter, compared with an increase of $190.6 billion, or 4.8 percent, in the first quarter. Real disposable personal income (after inflation is factored in) increased a very impressive 2.5 percent, compared with an increase of 4.4 percent in Q1.

But they are becoming more cautious about the future as the personal saving rate -- personal saving as a percentage of disposable personal income – is at 8.1 percent in the second quarter, compared with 8.5 percent in the first quarter, which are highs for this recovery.

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment, said the BEA. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending.

Economists had been predicting the slowdown for some time, as businesses are investing less this year. Manufacturing is the culprit, as no one wants to invest more in plant and equipment with the ongoing trade wars, as we have been saying. There is too much economic uncertainty in China and the EU, and growth in the rest of the world is also slowing because of the overall decline in foreign trade due to the uncertainties, according to the IMF.

The surge in consumer spending was also predicted by the jump in retail sales reported last week. Retail sales rose in June for the fourth month in a row, quieting concerns that the trade wars and weaker manufacturing output would also drag down consumer spending. The most surprising strength in the report was a 0.7 percent jump in auto sales, which the only component of manufacturing seeing steady growth. Nonretailers (Internet), which continue to feed off of traditional retailers such as department stores, was also surprising with a 1.7 percent for the second month in a row.

So any further decline in GDP growth will probably be due to a slower accumulation of inventories and capital investments (as seen in the above capital-goods orders graph) and a growing negative imbalance in exports vs. imports with the decline in manufacturing.

If the Trump administration and Republicans would realize the damage confrontational trade wars and other fear-mongering policies do to GDP growth, they would end such tactics. But it is obvious they only see an upside in their continuing confrontation with allies and adversaries alike, which should come back to haunt them next year when the inevitable worldwide growth slowdown impacts US, and the Presidential election.

And guess what?  The price index for gross domestic purchases increased 2.2 percent in the second quarter, compared with an increase of 0.8 percent in the first quarter, which is a sign of looming inflation, and makes it more unlikely the Fed will want to lower their short term interest rates anytime soon.

Harlan Green © 2019

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Thursday, July 25, 2019

Home Are Sales Declining

The Mortgage Corner


WASHINGTON (July 23, 2019) – Existing-home sales weakened in June, as total sales saw a small decline after a previous month of gains, said the National Association of Realtors®. While two of the four major U.S. regions recorded minor sales jumps, the other two – the South and the West – experienced greater declines last month.

The problem is still not enough affordable housing. The demand is there for mid-range housing, as 56 percent of homes sold in less than 30 days, and unsold inventory is at a 4.4-month supply at the current sales pace, up from the 4.3 month supply recorded in both May and in June 2018; when there is normally a 6-month supply if supply and demand are in balance.

Total existing-home sales,, completed transactions that include single-family homes, townhomes, condominiums and co-ops, dropped 1.7 percent from May to a seasonally adjusted annual rate of 5.27 million in June. Sales as a whole are down 2.2 percent from a year ago (5.39 million in June 2018).
“Home sales are running at a pace similar to 2015 levels – even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country,” said Lawrence Yun, NAR’s chief economist. Yun says the nation is in the midst of a housing shortage and much more inventory is needed. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” he said.
Yun said other factors could be contributing to the low number of sales, as well. 
“Either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure. It’s too soon to know how much of a pullback is related to the reduction in the homeowner tax incentive.”
 What are consumers doing with their high net worth? Many are remodeling, instead of moving. Existing-home owners are remaining in their homes much longer. The recent average is 10 years, when 4 years has been the historical average years of duration in the same residence.

There are slightly more first-time buyers this season with record-low interest rates. First-time buyers were responsible for 35 percent of sales in June, up from 32 percent the prior month and up from the 31 percent recorded in June 2018.

Construction of new houses also fell slightly in June and permits sank to the lowest level in two years, exacerbating the shortage and suggesting a sluggish U.S. housing market has failed to gain much momentum from lower mortgage rates.


Housing starts slipped 0.9 percent to an annual pace of 1.25 million last month, said the Commerce Department. That’s how many homes would be built in 2019 if construction took place at same rate over the entire year as it did in June.

Permits to build more homes, meanwhile, sank 6.1 percent to a 1.22 million pace, the government said Wednesday. That’s the lowest level since mid-2017.

And lastly, new-home sales also declined to a lower-than-expected 646,000 annual rate. The 3-month average is at 636,000 which compares unfavorably against a 673,000 peak in April.

This was still the highest sales for June since June 2007, and annual sales in 2019 should be the best year for new home sales since 2007, according to Calculated Risk, and suggests homebuyers haven’t let up on their enthusiasm to own a home, if they can afford one.

Harlan Green © 2019

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Tuesday, July 23, 2019

It's Up To the Consumers!

Popular Economics Weekly

Consumers are feeling good enough to keep the US economy from sinking into recession at the moment. The consumer sentiment survey edged up to 98.4 this month from 98.2 in June, according to a preliminary reading from the University Michigan.
“Consumer sentiment remained largely unchanged in early July from June, remaining at quite favorable levels since the start of 2017,” said survey chief economist Richard Curtin. “Moreover, the variations in Sentiment Index have been remarkably small, ranging from 91.2 to 101.4 in the past 30 months. Perhaps the most interesting change in the July survey was in inflation expectations, with the year-ahead rate slightly lower and the longer term rate moving to the top of the narrow range it has traveled in the past few years.”
Actually, sentiment has been fluctuating in that range for several years, per the FRED graph, as economic growth and employment finally ramped up in 2015 after the Great Recession, boosting consumer confidence.

Curtin believes that inflation expectations affect consumer confidence, as the survey indicates consumer expectations for growth and jobs (hence confidence) rise with a lower inflation rate. Hence the Federal Reserve mandate to keep inflation stable while low enough to enable growth.  So today’s ultra-low inflation (and interest rates) could be encouraging consumers to spend more.
“The Consumer Expectations Index falls as inflation expectations rise, signifying that consumers view higher inflation as a threat to economic growth,” he continued. “Higher inflation was related more frequently to rising interest rates and was associated with higher unemployment expectations.”
The Conference Board’s Index of Leading Economic indicators (LEI) that is a good predictor of economic activity over the next six months was not so optimistic.
“The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”
Why? Manufacturers’ new orders, building permits in latest housing starts survey, and the yield curve were negative. The interest rate spread between the 10-year Treasury note and fed funds rate has sunk to negative -0.31 percent, from a positive +0.56 percent last December. Long term interest rates sinking below short term rates is a sign of slower growth, since investors rush to buy longer term Treasury bonds as a safe haven if there is too much economic uncertainty, as is happening at present.

A simple way to fix the inverted yield curve problem is for the Fed to lower the fed funds rate again. But is that the right thing to do when retail sales are soaring, and June payrolls totaled 224,000 new jobs? The economy is booming, in other words, so the Fed would normally allow higher interest rates unless other forces are at work—such as White House tweets that are artificially boost stock prices (which enrich stockholders and corporate CEOs), rather than policies that would help Main St. workers—like a higher minimum wage, and better worker protections, and strengthening health care policies, which would promote longer term economic growth.

So in fact other sectors of the economy have to be boosted, if we are to continue in this ‘goldilocks’ growth cycle (i.e., not too hot or too cold). Consumers won’t continue to party, otherwise.

Harlan Green © 2019

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