“The economy hasn’t lost its mojo.” MarketWatch

 Financial FAQs

“Advance estimates of U.S. retail and food services sales for June 2026, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $768.6 billion, up 0.2 percent (±0.4 percent)* from the previous month, and up 6.7 percent (±0.5 percent) from June 2025.” Census.gov

FREDretailsales

Headlines, such as that consumers “haven’t lost their mojo” have popped up when retail sales rose 0.2 percent in June. It’s a sign of consumers are willing to ‘shop until they drop’, which may keep the U.S. economy growing for some time.

It also means that same level of irrational exuberance of the 1990s is back once again, with the major market indexes at record levels, and consumers seemingly oblivious to the conditions that prevailed during the late 1990s.

 Nobel Laureate Robert Shiller first presented the term irrational exuberance to Alan Greenspan’s Federal Reserve Governors in 1996 to evidence how overvalued stock market levels had become at the time. But it wasn’t until 2000 that the dot-com asset bubble burst that many market commentators and some economists are comparing to the current record market rally.

The MarketWatch headline portrays most of the media’s reaction to the latest Advance Retail and Food sales report by the U.S. Census Bureau. The slightly hysterical headline is really a sign of relief because of the slight drop in monthly gas prices that prevailed during the 60-day cease fire agreement.

But the cease fire has ended. And it reveals how badly the Trump tariffs and Iran war have hurt consumer spending, still the backbone of U.S. economic growth. We have been a consumer-driven economy since the 1950s and end of World War II.

And since retail sales are not inflation adjusted, when adjusted for inflation, gas and food in particular have become less affordable. Retail inflation is still above 3 percent. Retail sales have fluctuated wildly, as per the above graph, rising 6.7 percent in 12 months because consumer bought more in earlier months to get ahead of the rising inflation—i.e., before the Iran War began to jack up everyday prices.

Though sales at car dealers and online merchants both jumped about 2 percent in June, sales fell at grocery, clothing and healthcare stores, says MarketWatch.

So, consumers are still shopping because they must, putting them further in debt. The Consumer Price Index for basic necessities like gas and food is still above 3 percent, as I said, and the wholesale (PPI) price index for raw materials that go into retail goods is 5.5 percent annually, the U.S. Bureau of Labor Statistics reported. It’s still the largest rise in more than three years.

We don’t have to look at just the dot-com bubble to compare, either. I see an unsettling resemblance to the ‘roaring twenties’ of an earlier era from the recovery of another pandemic, the Spanish Flu pandemic of 1919 to 1920 that killed what would be millions of Americans if at our current population level.

It was a long recovery—until 1929 and the Black Friday stock market crash that led to the Great Depression, caused in part by another era of high tariffs that led to product shortages.

How long may this era of irrational exuberance last that has driven the financial markets to record levels with so much wealth pouring into a new space age that will take us years to return to the moon, much less turn a profit?

We are at another turning point in what currently looks like an A.I. revolution, much like the Internet’s introduction that took decades to adopt, and recovered from a Great Recession, let’s not forget.

So the best way to survive another bout of irrational exuberance is to be patient, in my opinion, rather than listen to the crowd that promises the next big thing.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why the Housing Shortage?

 The Mortgage Corner

How can we recover from our housing shortage that has resulted in record homelessness and a lack of affordability for many young households?

FREDhousingstarts

There haven’t been enough homes built to satisfy prospective home buyers for a decade—from the end of the housing bubble until 2020, thanks to the oversupply generated during housing bubble and Great Recession, as can be seen in the FRED graph of housing construction dating from 2000 (large gray bar is the Great Recession).

Builders are still not building enough homes to keep up with population growth while builder confidence remains stagnant in the face of weaker homebuyer demand. August housing starts declined 8.5% month-over-month to a seasonally adjusted annual rate of 1.307 million units, according to the latest data released by the U.S. Census Bureau.

Builders had been constructing 1.6 to over 2 million new housing units until January 2006 at the height of the housing bubble because they thought they had prospective homebuyers with adequate incomes and credit that could afford the purchases.

But lax regulations and supervision during the GW Bush administration by the U.S. Treasury and Alan Greenspan’s Federal Reserve allowed for anyone to qualify to buy a home with so-called liar loans that had artificially low start rates. The housing bubble burst when Greenspan finally began to raise interest rates to combat the rising inflation, which caused a massive defaulting of the liar loans.

More than one million new households per year are still being formed but it wasn’t until 2013 that more than one million new units were being built again. And 8.7 million jobs were lost during the Great Recession, compounding the problem of affordability.

In a word, builders must build more affordable homes. At one time 40% of existing-home sales were entry-level, first-time homebuyers that could afford to buy a home. It’s just 28% in the latest sales report by the National Association of Realtors (NAR).

Existing-home sales remained essentially the same in August, ticking down by 0.2% from July, according to the National Association of REALTORS® Existing-Home Sales Report. Existing-home sales are also hurting because of the lack of affordable financing with the 30-year fixed rate mortgage still above 6%.

"Record-high housing wealth and a record-high stock market will help current homeowners trade up and benefit the upper end of the market. However, sales of affordable homes are constrained by the lack of inventory," Yun added. "The Midwest was the best-performing region last month, primarily due to relatively affordable market conditions. The median home price in the Midwest is 22 percent below the national median price."

We got to the housing shortage largely because of bad politics and a record income inequality for working Americans that must be reversed. The best programs that subsidize building for more affordability include zoning for more units in areas near transportation centers, a state and local government mandate, and more funding set aside for affordable housing, such as tax breaks to builders for building more low income and first-time homebuyers.

Biden did that during his four years with his Housing Action Plan, that subsidized affordable housing as well as rents, but alas, much of that funding has been cut by Trump’s DOGE team in the name of downsizing government.

And a brisk summary of what Trump is doing to HUD, the government’s main housing administrator, is summarized by Shelterforce:

· HUD relaunched its website in late March, after removing 90 percent of

its content, under the pretext of improving user experience. Research publication archives, recent press releases, and much more were removed, and a religious quote of Secretary Turner’s was placed on the homepage.

· HUD Headquarters to Be Sold: With an April 15 executive order intended

to “restore common sense to Federal office space management by freeing agencies to select cost effective facilities and focus on successfully carrying out their missions for American taxpayers,”

The Trump administration, in other words, is doing almost nothing at the federal level for housing in its quest to slash government spending in order to fund Trump’s tax cuts.

Why must the federal government do better to support housing? The GW Bush administration set housing construction back a decade by causing the housing bubble with lax regulation and too easy credit conditions.

The American people will want a government that better serves Americans’ housing needs to make up for the years of mismanagement and neglect. Otherwise, the dream of many Americans for more affordable housing will forever be out of reach.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Irrational Exuberance is Back

 Financial FAQs

“How errors of human judgment can infect even the smartest people, thanks to overconfidence, lack of attention to details, and excessive trust in the judgments of others, stemming from a failure to understand that others are not making independent judgments but are themselves following still others—the blind leading the blind.” Robert Shiller, Irrational Exuberance

FREDS&P

Both the DOW and S&P 500 indexes of the largest publicly traded companies in the U.S. are at record levels, despite Donald Trump having just raised tariffs on 90 countries that he doesn’t like for some reason. April 2 was the last time he made such an announcement and the S&P plunged 828 pts. on the same day (see dip in graph), and the DOW more than 1,000 pts. before resuming their climb.

Yet the financial markets aren’t panicking this time, maybe for the wrong reasons. Their over enthusiasm, which was first termed irrational exuberance by Fed Chair Alan Greenspan in the mid-1990s as a warning that stocks were overpriced, has created a new asset bubble much like the dot-com asset bubble, and housing bubble that led to the Great Recession.

And such massive overinvestment in new technologies such as the current AI investment boom haven’t turned out well, historically.

Nobel Laureate Robert Shiller first wrote about it in his 2000 book, Irrational Exuberance, just before the bursting of the dot-com speculative bubble, which was precipitated by overinvestment in communication technologies such as the nationwide laying of fiber optic cables.

He said at the time: “I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.^”

Companies are investing $trillions in developing AI, which is powering the largest Magnificent 7 tech stocks such as Apple and Facebook to record highs. Market analysts on CNBC have noted that ten stocks are driving 40 percent of the market’s current rally.

Yet just 9.4% of U.S. businesses used AI in July, including machine learning, natural language processing, virtual agents, and voice recognition, according to the Census Bureau as cited by Barron’s Megan Leonhardt.

S&P members’ current earnings per share reflect this. Stock prices have climbed to 29 times earnings which, according to Professor Shiller’s research, is approaching irrational exuberance territory. This is double the S&P’s historical EPS average price of 15 times earnings over the past 100 years that Dr. Shiller has researched.

The markets seem to be ignoring Trump’s erratic behavior for other reasons as well. This is in part because of investors’ belief that inflation is mild, though still rising. The Fed’s favored PCE inflation index for June increased 2.6 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago, still above the Federal Reserve target inflation rate.

And the long-awaited interest rate cuts financial markets haven been hoping for could begin in September after the very weak July unemployment report that caused Trump to fire the BLS Director.

The markets are also ignoring the damage Trump’s higher tariffs will cause to economic growth. History has shown that stagflation is a recurring problem, even during the COVID-19 pandemic. Supply chains dried up then as the world economies shut down, elevating inflation. And supply deliveries have already slowed from the effects of Trump’s on-again, off-again executive orders, as countries look for ways to reroute their exports.

Maybe the greatest sign of irrational exuberance is investors’ assumption that TACO Trump will eventually settle tariffs back to the 10 to 15 percent rates that he initially promised. But when?

Trump and Republicans have always had a problem with the truth and economic facts (like who benefits most from tax cuts), as has been pointed out by those professionals whose job it is to ascertain the facts (with many losing their jobs because of it).

Irrational exuberance has seriously damaged financial markets in the past and caused $trillions in losses. It happens when investors ignore financial facts that aren’t convenient or follow the herd rather than make the effort to read below the headlines.

What will happen this time when market investors realize this administration doesn’t believe in the facts at all?

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Second Quarter Growth No Big Deal

 Financial FAQs

“Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2025 (April, May, and June), according to the advance estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP decreased 0.5 percent.” BEA.gov

BEA.gov

The big jump in second quarter economic growth wasn’t a surprise. Consumers continued to shop but bought fewer imported goods because Trump's tariff wars were already raising prices. Imports are a subtraction in the GDP equation.

It might be a one time jump because consumers are saving more and buying less these days, as I’ve been saying, while waiting to see how much damage the Trump tax cuts and higher tariffs might wreak on the U.S. economy, especially to those it will harm the most.

The two-month GDP average was a 1.3% growth rate. The U.S. economy expanded at a 2.8% rate in 2024 and 2.9% in 2023 under President Biden, which was in large part because of the New Deal legislation that pumped $billions into economic growth and caused higher inflation.

The Fed then raised their interest rates to bring inflation back down to its present mid-2% range, and Republicans took over the congress. The result was Trump initiated his tariff wars and passage of the big beautiful big tax bill that will increase the federal debt by some $4 trillion.

But because at least some of the additional federal debt must be paid for to preserve the no longer great faith and credit of our economy, Trump has raised tariff rates to 15-20 percent, which means raising taxes on U.S. consumers and businesses.

And as any economist will tell you, taxes slow economic growth, regardless of what Trump and his cabinet cronies say. And our economy is slowing. The so-called final sales of consumers and businesses increased just 1.2 % in Q2, and there is no indication that it might pick up as the tariff agreements (i.e., taxes) are finalized.

Inflation has declined because of less spending. Consumers spending as measured by the personal consumption expenditures (PCE) price index in the Q2 GDP report increased just 2.1 percent, compared with an increase of 3.7 percent. Excluding food and energy prices, the PCE price index increased 2.5 percent, compared with an increase of 3.5 percent because consumers bought ahead of the price increases due to the April 2 tariff announcements.

What about those Federal Reserve interest rate cuts that Trump wants? Fed Chair Powell said at his latest press conference after the July FOMC meet that its twin mandates of price stability and maximum growth are still in balance, so there’s no reason to lower interest rates at this time.

The unemployment rate remains stuck at 4.1-4.2 percent because the mandates are in balance. Powell said the Fed would act to lower interest rates sooner—i.e., ease credit conditions--if the unemployment rate were to increase substantially.

The Trump administration’s agenda paints a sordid picture in following a very similar trajectory of the GW Bush administration—with its wars on terror (like Trump’s tariff wars), huge tax cuts for the wealthiest and less regulation (like Trump’s big beautiful bill) fueling what became the Great Recession.

Trump’s tariffs won’t help the very people in the red states that elected him but raise their prices. His cuts to social services harm those in red states in the most need. His DOGE cuts are not only endangering air travel, but disaster relief when the worst storms are also happening in mainly red state territories.

So, its not even the blue states that Trump wants most to harm, but his own MAGA supporters that will suffer the most. It’s what bullies do, prey on the weakest and most vulnerable, especially immigrants and minorities that are least able to protect themselves.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The EU's New Trade Deal

 Popular Economics Weekly

“This will hurt the world economy, with the burden falling mainly on lower-income Americans. The Yale Budget Lab estimates that Trump’s tariffs will leave the U.S. economy 0.4 percent poorer in the long run, which is very close to my own back-of-the-envelope calculations.” Paul Krugman

Evelyn Hockstein | Reuters

I quote Paul Krugman again as with Trump’s Japan trade deal because it is also Trump’s usual smoke and mirrors—lots of promises but little substance. Why are markets relieved that Trump’s announced 30 percent EU retaliatory tariffs are now 15 percent, when retaliatory tariffs are illegal according to the Foreign Trade court?

Because it means less chaos and more predictability for the moment, but only for the moment.

Neither the EU nor Americans are better off with the new 15 percent tariffs levied on EU products, but none on U.S. exports to the EU. And it will once again shift more of the burden of paying off the tax cuts that benefit Trump and his buddies “onto poor and working-class families,” per Krugman

There is a very small trade imbalance when services as well as goods are included in our trade with the EU, despite Trump’s claims there’s a huge trade deficit. And U.S. exports to EU have just a 1 percent tax at present, so there’s no discrimination.

The biggest lie of all is Trump’s attempt to disguise the fact that a tariff isn’t an import tax, when it is levied at the U.S. Custom ports on goods entering the U.S., not elsewhere.

“…the tariffs are basically a sales tax that will reduce real income for poor and working-class families by about 1.5 percent, even as cuts in other taxes raise income for the wealthy,” says Krugman.

The trade deals are also hiding the fact that neither Japan nor the EU requirements for investing in the U.S. are specific enough.

The tariffs on EU manufactured autos will be lower than those manufactured in the U.S. and Canada, for instance, as with Japan. And the investment guarantees don’t specify whether they will result in actual factories.

So what are the Europeans really paying for? Protection. They have promised to buy more American weapons and keep Trump on their side in the Ukraine war that requires U.S. weapons to stop Putin and end the war.

There is much more to Trumponomics, Trump’s economic agenda, that I will cover in future columns. His insistence on cutting interest rates resembles GW Bush’s push to have then Fed Chair Alan Greenspan’s Governors keep interest rates artificially low to pay for his wars on terror. The inflation rate then was higher, in the 3-5 percent range.

I believe we will see inflation rise to a similar range when the tariff taxes really begin to take effect and kick in the slower growth plus higher inflation formula that prevailed during the Greenspan era at the Federal Reserve, and led to the Great Recession.

Trump contends the U.S. will no longer be paying as much to defend Europeans. Their smaller defense budgets made it possible for Europeans to afford their universal health plans and better social services, higher minimum wages, paid leave and mandated vacations.

The problem with having a conman as our president, is that most Americans won’t benefit from the cutbacks in military aid to the EU. We aren’t reducing our military budget but increasing it, while reducing our already underfunded social safety net, including social security.

What happens when the smoke clears and ordinary Americans realize that we have been short changed?

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Irrational Exuberance vs. Irrational Pessimism?

 Popular Economics Weekly

I don’t believe Wall Street investors are irrationally exuberant at present, contrary to those that say we are now in a stock market bubble with the record level S&P and DOW indexes.

It’s as easy to be irrationally pessimistic about the future as are many Main Streeters that don’t feel so good about themselves or the US economy.

The indexes are high because corporations show record profits, in part thanks to the $trillions in pandemic aid, but also because of the excessive profit-taking by major retailers that took advantage of the product shortages caused by the COVID pandemic shutdowns, which has been confirmed by the FTC.

Large grocery store chains exploited product shortages during the pandemic by raising prices significantly more than needed to cover their added costs and they continue to reap excessive profits, according to a Federal Trade Commission report.

Much of Main Street, ordinary working adults in the main, have become the opposite, irrationally pessimistic, in my opinion. Surveys such as a recent PEW Research survey I highlighted last week show this is so.

In a poll by PEW Research, “About three-in-ten Americans (28%) currently rate national economic conditions as excellent or good, while a similar share (31%) say they are poor and about four-in-ten (41%) view them as “only fair.”

PEW

Why such divergent opinions when we are fully employed and have surging economic growth? The most recent Conference Board’s Consumer Confidence survey helps to explain it.

Right and left wing partisans are now controlling the debate. Middle-income Americans, which are most working Americans, are exhausted and pay little attention to economic data, which is difficult to understand even by economists.

Most consumers remain concerned about high inflation, the contentious budget debate, and partisan bickering of the Presidential election campaign.

“Consumers remained concerned with elevated price levels, which predominated write-in responses, said Dana Peterson, its Chief Economist. “March’s write-in responses showed an uptick in concerns about food and gas prices, but in general complaints about gas prices have been trending downward. Indeed, average 12-month inflation expectations came in at 5.3 percent—barely changed from February’s four-year low of 5.2 percent.”

“Recession fears continued to trend downward both in write-in responses and as measured by consumers’ Perceived Likelihood of a US Recession over the Next 12 Months,” he continued. “Meanwhile, consumers expressed more concern about the US political environment compared to prior months.”

The PEW survey chart above shows the tug-of-war between extreme right and left political factions controlling the debate, while 41% of the Americans surveyed viewed economic conditions as “only fair”.

Why? Most Americans are exhausted and still recovering from the pandemic. There is a divergence between those experiencing irrational exuberance vs. irrational pessimism because most of those polled aren’t as knowledgeable about real economic data and business cycles that are published by the government and private providers. So they must rely on their immediate experience; much of it due to the trauma caused by the COVID pandemic that killed one million Americans.

PEW said, however, expectations for future economic conditions are more positive than they were last spring: Today, roughly a quarter say that they expect economic conditions will be better a year from now (26%) – up from 17% in April 2023.

There is hope, in other words, because of a resurgent US economy, the strongest economy in the world, that they will eventually realize their jobs are safe and secure in such an environment.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why the Irrational Pessimism?

 Financial FAQs

Public polls seem to be saying one thing, economic facts another. Real Clear Politics compendium of 11 opinion polls on whether participants approve or disapprove of President Biden’s handling of the economy show a negative -22.5 percent spread.

Yet we have had the unemployment rate below 4 percent for two years, current inflation is hovering at 2.5 percent and still declining, and consumers continue in record numbers to travel and enjoy leisure activities.

FREDunemployment

Household wealth has also increased 37 percent since 2019, per the New York Fed, the minimum wage has risen to the mid-teens in most states (except a few red states), and there is a labor shortage with nine million job vacancies that has resulted in record wage increases in multiple industries.

Why the disconnect between economic reality and public opinions? Could it be poll takers are asking the wrong questions, like are you better off today than during the pandemic?

Most of the respondents say they are personally better off, but the economy isn’t improving. How can that be?

I maintain it is what I call the Irrational Pessimism of investors, which are most Americans that respond to said polls. It is the opposite of what Nobelist Robert Shiller has called Irrational Exuberance, but for the same reasons.

Yale Professor Shiller is one of the founders of behavioral finance and author of many books that won him the Nobel Prize in 2013. His research has said that most people act irrationally when making financial decisions. Such decisions are mainly based on hearsay, rumors, and plain old irrational exuberance.

For example, the housing bubble was caused by the public’s belief that housing prices only rose but never fell since they hadn’t fallen for decades, said Shiller.

Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession, as I said recently.

So why would not the public behave irrationally having just weathered the worst pandemic in 100 years—that is, being irrationally pessimistic in the face of so much financial trauma?

His research and that of other Neo-Keynesian (those who essentially believe that government is needed to maintain a healthy economy, as happened with FDR’s New Deal) show that most financial decisions aren’t based on the careful search of facts, but mental laziness, even in the housing market.

It has essentially refuted those economists who believed since the 1970s that financial markets behaved rationally—i.e., that investors carefully thought through their financial decisions, hence unregulated, free markets were the surest way to prosperity.

That didn’t prove the case, of course, as the six recessions since 1980, including the Great Recession, have proven.

So, in fact, poll respondents may not be thinking of their own personal well-being in these polls. They tend to act more rationally when the personal stakes are highest.

But understanding complex markets is another matter, and one that takes more time and effort. Perhaps by November and presidential election time rolls around, the American public will take the economic consequences of their decisions more seriously, and not leave it to hearsay, word-of-mouth and irrational pessimism. Let us hope so.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Please Lower Interest Rates Sooner!

 Financial FAQs

If I were the Fed Governors, I wouldn’t wait for inflation to drop further to begin lowering interest rates. The inflation rate has been falling steadily for more than a year and we might be in the midst of a deflationary spiral. Sound impossible? It could be if the Fed doesn’t see the writing on the wall.

The cost of living measured by the Consumer Price Index rose just 0.1 percent in November thanks to lower oil prices. Without food and gas prices, so-called core consumer prices rose a somewhat sharper 0.3 percent last month and matched the Wall Street forecast. And the annual rate of inflation slowed to 3.1 percent in November from 3.2 percent in the prior month, matching the lowest level since early 2021.

The next stage could be outright deflation, which nobody wants because it has spelled recession in the past. Why? Because the steep decline in inflation over a short period means a looming oversupply of things at the same time as sky-high interest rates, and that was the cause of past recessions.

The first indication of oversupply is gas prices, which are falling fast. As of Monday, the average national price for regular unleaded gasoline stood at $3.153 a gallon, down from $3.242 a week ago, and down from $3.376 a month ago, according to AAA.

AAA.com

The main reason is a weaker cost for oil, which is struggling to stay above $70 per barrel.  The falling price comes just a week after OPEC+ announced voluntary production cuts of about 2 million barrels daily. 

“Historically, crude oil tends to drop nearly 30 percent from late September into early winter with gasoline prices trailing the play,” said Andrew Gross, AAA spokesperson. “More than half of all US fuel locations have gasoline below $3 per gallon. By the end of the year, the national average may dip that low as well.”

Inflation is falling fast with the 6-month CPI already down to 2.5 percent, yet unit wages are rising 4.0 percent annually in November’s unemployment report. So inflation today is being caused by higher rents and used cars, not oil prices as happened in the 1970s or rising wages.

We now know why inflation is falling. Nonfarm labor productivity is soaring, up 5.2 percent in the third quarter of 2023 as output increased 6.1 percent and hours worked increased 0.9 percent.

The increase in labor productivity is the highest rate since the third quarter of 2020, when productivity increased 5.7 percent. From the same quarter a year ago, nonfarm business sector labor productivity increased 2.4 percent.

The last time we approached bubble territory was an oversupply of housing in early 2000 that led to the housing bubble and Great Recession. Labor productivity was as high in Q1 2002 at 5.8 percent.

Under Fed Chairman Alan Greenspan, the Fed didn’t recognize the housing bubble until it was too late (In part due to lax supervision by the GW Bush administration Treasury and Greenspan’s Fed). In fact, he even encouraged homebuyers to take out adjustable-rate mortgages to prolong the housing market rally.

He then held the same 5.25 percent Fed Funds rate too long—10 months from August 2006 to June 2007—before the fed began to drop rates.

But by then it was too late. The Great Recession began in December 2007. Housing values had already begun to plunge due to a one-million-unit oversupply and the mortgages tied to them became worthless because they could no longer be serviced due to soaring mortgage rates that followed the Fed’s rate hikes.

Can this happen again? There is a pronounced undersupply of housing today with builders racing to catch up, so there is little danger of a housing bubble. Instead of looking backwards to the 1970s when oil shortages led to the inflationary spiral, the Fed should be focusing on possible oversupply today and falling prices as the production of things continues to ramp up.

There could be an oversupply in the industrial sector, for instance—of computer chips in particular as new factories begin to produce, and ordinary commodities as labor productivity stays high with AI and supply-chains continue to improve.

And let’s not forget the four bank failures to date due to the Fed’s rate hikes. The Fed should not forget the failure of Lehman Brothers and many other financial institutions that was also part of the Great Recession.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What is Normal Inflation?

 Financial FAQs

I have found support for my contention that the Fed should be done with raising interest rates and in fact drop them sooner rather than later, or we will see a full-blown recession.

Campbell Harvey, a Duke University finance professor best known for developing the yield-curve recession indicator in an interview on MarketWatch, says the Federal Reserve’s read on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing.

FREDcpi

Why? Because, “Harvey said that if shelter inflation were normalized at around 1% or 1.5% (It’s longer term average), overall core inflation would measure closer to 1.5% or 2%. In other words, at — or substantially below — the Fed’s 2% target,” said MarketWatch’s Mark DeCambre.

Shelter costs are a lagging indicator; rental costs lag other costs because rental contracts typically change annually.

That is why there isn’t an accurate measure of today’s retail CPI inflation in particular, which is still positive.

The inflation rate is declining but still positive, which is called disinflation in economists’ terms. Yet if prices actually begin to drift into negative territory, it means we are in a recession. And prices have fallen precipitously since June 2022 when it reach 7 percent (see CPI graph above), though rising from its low of 3 percent to 3.7 percent over the past two months.

This is a huge plunge that signaled supply chains wasted little time in catching up to demand. Consumer prices ex-shelter were up +1.9 percent on a year-over-year basis in August, up from +1 percent in July, according to the Labor Department.

That is a verly low inflation rate, and skirting an outright deflationary spiral if the trend continues, as prices are wont to behave during business cycles.

Professor Harvey says he was right in predicting eight of the last recessions when the yield curve inverted. That is a time when the yield curves of the 10-year and 3-month fixed rates are inverted from their normal relationship. The 10-year yield is normally higher than the 3-month yield because it is for a longer term (i.e., 10 years).

But when reversed, banks cannot profit when they must lend money at a lower rate (many lone rates are based on 10-yr yield) than they borrow (e.g., at 1-3 mos.) when inverted, hence credit conditions are tightened, if it is prolonged.

And adding to the possibility of recession are the Fed’s credit-tightening rate hikes lasting more than one year.

It’s a dicey time when Fed officials seem to believe prolonged inflation is right around the corner. They just lowered their rate-reduction schedule from four to two times next year at last week’s FOMC meeting.

@paulkrugman

Nobel Laureate Paul Krugman has been saying this for months. His ‘supercore’ CPI with consumer prices excluding more volatile food, energy, used cars and shelter is at 2 percent.

Yet we know what can happen when rate hikes are prolonged for too long. When former Fed Chair Greenspan and his Governors raised interest rates from 1 percent to 5.25 percent with 16 consecutive rate hikes from May 2004 to June 2006—the Great Recession followed.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Will It Be a Soft Landing?

 The Mortgage Corner

There is a growing optimism Jerome Powell’s Fed can engineer a so-called soft landing with its restrictive monetary policies, which means avoid an outright recession.

Why? First quarter 2023 GDP growth is predicted to be positive following strong Q3 and Q4 growth in 2022, and we are still fully employed. This is in part because the US economy has recovered faster from the pandemic than other countries.

But the Federal Reserve’s last attempt to engineer a soft landing with a 2 percent inflation target resulted in the Great Recession, the worst worldwide downturn since the Great Depression.

Alan Greenspan, the Fed Chairman and his Fed Governors at the time thought that if they raised the overnight Fed funds rate slowly enough, they could tame inflation while avoiding a recession.

The funds rate was raised in increments of 0.25 percent 16 consecutive times in a vain attempt to mitigate what actually occurred. It was an example of the Fed wanting to have its cake and eat it too.

It was a different time, however. Inflation soared then because the GW Bush administration in 2001 took their hands off regulations, allowing the falsification of credit ratings, while cutting taxes to create the first $trillion budget deficit in our history.

And many traders are under what may be a similar illusion; that a so-called ‘soft landing’ is achievable with the Fed holding to its 2 percent inflation target.

However, because inflation measures have never had more than plus or minus 2 percent accuracy, pressing for a 2 percent target could bring actual inflation to zero, which is tantamount to a recession.

This fact was explicated by David Wheelock, a St. Louis Fed group vice president and deputy director of research, in a 2017 podcast.

“The price indexes that are used to estimate inflation don’t necessarily include all goods and services in an economy. Furthermore, these indexes have a slight upward bias. So, when the observed rate of inflation is, say, 1 or 2 percent … the true measure is actually probably lower than that, closer to zero.”

FREDpce

Another well-known fact is that prices plunge substantially during recessions when consumers slow spending, which is portrayed in the above FRED of personal consumption expenditures, our best measure of consumer spending.

Consumption only dipped below zero once since 1950, during the 2007-09 Great Recession that was worldwide, as I said. All other recessions (gray bars in graph) showed a consumption drop that was quickly mitigated by the Fed reversing course and dropping their interest rates.

So what is different this time? The last recession lasted just two months—from Mar-April 2020—caused by the first worldwide pandemic in 100 years that shut down economic activity completely, rather than an over-heated economy.

The inflation rate quickly dropped to zero, but took off as quickly because of the $trillions in pandemic aid, igniting the latest inflation surge. Other countries are taking longer to recover, and so the supply-chains are playing catchup to the surging demand for more goods and services.

When will a new equilibrium between supply and demand be established? It’s hard to say with a fully employed economy and consumers so willing to spend.

Larry Summers is the preeminent inflation hawk, though he has softened his rhetoric of late as inflation has subsided. I repeat a recent quote of his from Bloomberg news that has been scaring financial markets.

“We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a recent speech in London. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on an outmoded thesis of classical economic theory left over from the inflationary spiral of the 1970s; suppress demand by suppressing hiring and the labor market with very high interest rates rather than wait for healthier supply-chains.

And supply-chains are recovering. The US Chamber of Commerce just reported for all of 2022 that exports of goods and services increased $453.1 billion to $3,009.7 billion, passing the $3 trillion mark for the first time. Imports of goods and services hit $3,957.8 billion, up $556.1 billion from 2021 and the highest on record.

Increasing supplies should continue to bring down inflation, in other words. But holding to a 2 percent inflation target, though Powell had said the Fed would be flexible, almost guarantees a recession.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why the Irrational Exuberance In Such A Dangerous Year?

Financial FAQs

Wrightson.com

We are now living in a much more dangerous world, because there is the possibility of war in the Middle East that is accompanying the various trade wars waged by the “Make America Great” White House.

In fact, it may have already begun with the “revenge” missile attacks by Iran against two Iraqi military bases housing U.S. personnel—though no casualties were reported. My wonder is that stocks are rallying on the news, with the DOW Jones up 200 points at this writing. Have stockholders forgotten the irrational exuberance reigning during Fed Chairman Greenspan’s tenure in the last decade?

It was such that Greenspan, et. al., raised the Fed’s interest rates 16 times (a total of 4 percent) over 2 years, which ultimately led to a busted housing bubble and the 2017-19 Great Recession that hasn’t been a full recovery for the majority of Americans.

In fact, median household incomes are still at 1970’s levels when inflation is subtracted, because most of the growth has been in stocks owned by just 50 percent of households, not with the wages and salaries of working folk. Hence the record income inequality that isn’t getting better, even at full employment.

And what if stocks plunge again as during the Great Recession that lost an estimated $9 trillion in value, with housing values also declining almost as much (the mainstay of middle class wealth)?
Greenspan had held rates too low for too long to finance the Bush/Cheney Iraq and Afghanistan occupations while cutting taxes at the same time, resulting in rising inflation and the largest federal budget deficit of the time.

In fact, we seem to be at the beginning of another period of irrational exuberance. The Fed dropped interest rates three times last year to boost slowing economic growth.

Manufacturing activity has been declining for the last five months, per Reuter’s Wrightson ISM Manufacturing Index graph above, mainly due to the various tariff hikes that bumped up prices on European and Chinese imports.

The service industries have been declining from a higher level of activity to the current 55 percent, reflected in the latest ISM non-manufacturing survey (also see graph, where a 50 percent result of those surveyed means breakeven growth).

“The upside surprise (of non-manufacturing survey) was almost entirely due to the subjective general business activity index, which rebounded by nearly six points to 57.2,” said Reuters.  “The employment and new orders indexes both fell.  The drop-off in employment was minimal (down 0.3 to 55.2), but the orders index fell off noticeably (down 2.2 points to 54.9, versus an annual average of 57.5). ”

Also important is the effect on world oil prices and economic growth in general, as I said in my last column, since the only reason the U.S. economy is continuing to grow is the very low inflation coupled with very low, recession-level interest rates. And that can’t be maintained if oil prices spike for some reason.

FRED.gov

We are skating on thin ice, economically, as I said, even if oil prices and inflation don’t spike as they did during the early and mid-2000s. Oil may not be as important, but 39.7 million Americans still live at or below the U.S. poverty level, which is $21,300 for a family of three in 2017, per the U.S. Census Bureau, and median household incomes after inflation are not improving.

So the real question is why on earth did the U.S. kill Iran’s leading general and several Iraqi militia commanders at a time of recovery from the Great Recession, slowing worldwide growth, amid growing geopolitical uncertainty?

It has to be another form of irrational exuberance held by certain parties that believe this will make America Great Again, but without the friends and alliances that made America great until now.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What is a Common Sense Stock Market?

Financial FAQs

Pundits and stock traders seem to believe Friday and Monday’s stock “massacre” was caused by too-quick trigger fingers—in computers controlled by algorithms, not people.

Whereas, investors and traders using their common sense would have seen the ‘yuge’ drop in valuations made no sense for many of the S&P 500 stocks of the largest US corporations that were making record profits.  Then they might not have oversold their holdings, as happened to those with the trigger-finger algorithms.

For instance, Boeing’s common stock price dropped $20 in a day when news came out that its profits are increasing and there are predictions of large future cash flows from its booming airline and defense businesses. And corporations such as Boeing will be saving $billions in future taxes due to the lower corporate tax rate.

What about the rest of the economy? Stocks have historically been a prediction of future economic activity, since they are priced at a discount to future earnings. So the total annual return of capital gains plus dividends can be a prediction of a company’s financial health.

Nobel laureate economist Robert Shiller in his best-selling Irrational Exuberance, a historical analysis of stock and bond yields, says stocks have earned $7 per year on average in capital gains plus dividends, bonds 4 percent per year for the past 100 years. 

And Dr. Shiller said Price-to-earnings ratios, another measure of stock values, averaged 15 to 1 historically. Today, the S&P P/E ratio is 17, meaning 17 times earnings, which is high, but not that high. In fact, the stock P/E’s reached 26 times earnings just before the Great Depression, and an oxygen-deprived 44 times earnings in 2000 on the eve of the dot-com crash.

That was why Dr.Shiller and Fed Chairman Alan Greenspan sounded the alarm over the  irrational exuberance that was “infecting” investors at the time. Dr. Greenspan’s famous warning was given in 1996, four years before the 2000 crash, when he said: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Japan has finally worked their way out of two decades of virtual deflation at a tremendous cost to growth, because of their spate of irrational exuberance. They now rank behind China and the European Union in the size of their economy.

Our stock market is in a similar circumstance today when too much money is chasing 50 percent fewer publicly listed stocks than in 1996, as I said in yesterday’s column. And there are already indications that corporations will be doing more of the same with the new tax savings.

But there is good news for employees. Friday’s unemployment report unveiled the largest pay increase in years. Average hourly earnings jumped to a year-on-year expansion best of 2.9 percent.  This is while the Fed’s core PCE inflation index is just 1.5 percent, way below its 2 percent stated target.

Graph: Econoday

Wages and salaries, the actual hourly incomes of normal working stiffs that excludes interest-bearing bank accounts, rental income, retirement benefits, stock dividends or annuities, actually rose year-on-year to 4.9 percent for its 5th straight climb and is now at its highest rate since November 2015.

And the just released JOLTS report of job hires and openings showed more workers quitting jobs voluntarily, which means they were finding better paying jobs. Job openings have slowed a bit, down 2.8 percent in December to 5.811 million, whereas Hires are steady, down fractionally in the month to 5.488 million. But that is keeping the spread between openings and hires also steady, at 323,000—which means 323,000 net job openings that haven’t been filled.

This might be why wages and salaries are finally increasing faster than the inflation rate, but it can also be that minimum wages in coastal states in particular are creeping toward $15 per hour by 2022, since 80 percent of the workforce depends on wages and salaries.

What should we make of the possibility of more irrational exuberance pushing stock valuations too high? Corporate profits will increase with the tax cuts, wages and salaries are soaring, and inflation is far away from the 2 percent target.

I believe investors should focus on price-to-earnings ratios, which also tell us whether stock prices have strayed too far from actual earnings.  Dr. Shiller warns irrational exuberance could infect investors again, if the S&P P/E ratio strays once more into the mid-twenties.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Opposing the Bully Mentality—Part II

Financial FAQs

How does one stop the bullies? Put simply, find a way to stand up to them. Economic bullies behave no differently than individuals when confronted by a person or organization willing to oppose them. But how are the 80 percent that are wage and salary earners to do that whose incomes has been whittled away since the 1970s by anti-union legislation and outright banning of collective bargaining in many of the right to work states?

Popular culture has enshrined the superhuman heroes who have tamed bullies; from Superman and Wonder Woman, to Batman, and now Captain America taming Nazi bullies. But taming economic bullies doesn’t have a popular precedent other than Robin Hood, it seems.

And Robin Hood was an English legend. America can only come up with its opposite, reverse Robin Hoodism, or taking from the poor and giving to the rich. That is how Nobelist Paul Krugman characterizes Republican attempts to cut taxes further and oppose raising the minimum wage.

“In the past, Republicans would justify tax cuts for the rich either by claiming that they would pay for themselves or by claiming that they could make up for lost revenue by cutting wasteful spending. But what we’re seeing now is open, explicit reverse Robin Hoodism: taking from ordinary families and giving to the rich. That is, even as Republicans look for a way to sound more sympathetic and less extreme, their actual policies are taking another sharp right turn.”

So the cards seem to be politically stacked against those who oppose the economic bullies. “(But) It wasn’t always this way,” says Marketwatch’s Rex Nutting. “In the 1950s, 1960s and into the 1970s, trade barriers, strong unions and discrimination gave workers (white male workers, that is) more bargaining power to get higher pay. It created the middle class.”

The result of such economic bullyism is that American wages haven’t grown since the 1970s, except for a brief period in the 1990s, when the Federal Reserve allowed the unemployment rate to fall to 4 percent, before beginning to raise interest rates. Thank you, President Clinton (and then Fed Chairman Greenspan during his easy money phase).

The share of national income that goes to labor (including the CEO’s salary and his stock options) has plunged from about 63 percent to 57 percent, says Nutting. The 6 percent of national income that’s going to profits instead of wages amounts to nearly $900 billion a year.

Graph: WSJMarketwatch

“For corporate businesses, after-tax profits are at record levels as a share of national income,” says Nutting. “Since the recession ended, profits are up 65 percent to $1.68 trillion last year. Small businesses aren’t doing quite so spectacularly, but their income is up 13 percent and their net worth is up 33 percent to $8.7 trillion since the recession ended. And the workers? Even after a big gain in the first quarter, median wages are down 3 percent since the recession ended.”

Many commentators and sociologists in particular assert 9/11 brought modern economic bullying to a high point. It’s rationale was the US put on a semi-permanent war footing, so that “Allegiance to the old public virtues—respect of the Bill of Rights, the Geneva Conventions and the rule of domestic and international law—was mocked and dismissed as quaint and soft by our new drill sergeants, according to a recent Canadian study. “From then on a state of emergency replaced the rule of law and set itself up as the norm.”

On a personal, workplace level, “If we are in a constant war-like mode societally, it sounds trivial, it sounds child-like, it sounds naively utopian to say, ‘Can’t we all get along?’” says Gary Namie of the Workplace Bullying Institute. “If you call for civility or a suspension of unmitigated, unfettered aggression, they call you a wimp. They think you are a wimp.”

There is another term for economic bullies, used by Professor Krugman, among others, in his most recent NYTimes column. They are sadomonetarists, or bankers and economists who want to tighten credit even during such tough economic times, as now: “At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.”

That, of course, is the most cogent definition of a bully. They want to demonstrate how tough they are, regardless of the consequences. For instance, the NAACP recently posted a report by Devin Burghart, Leonard Zeskind and the Institute for Research & Education on Human Rights called “Tea Party Nationalism,” exposing what it calls links between various Tea Party organizations and racist hate groups in the United States, such as white-supremacist groups, anti-immigrant organizations and militias, who have by definition, the bully mentality.

The bully mentality manifests in many forms, besides politically. The gun lobby via the NRA, ALEC, and other organizations have succeeded in blocking government study of the causes of gun violence, even though 31,000 gun-related death occur per year, the highest by a factor of 10 of any country in the world. Needless to say that inhibits development of policies and laws that might lower gun violence, whether in the schools or our inner cities.

So it turns out the bully mentality is part of human nature, really, and so part of our culture. It is then up to those employees who want to better themselves to find a way to oppose that culture and mentality. That means pushing back against the fear that such bullying engenders in all of us—against the ‘boss’ mentality, as well. Remember, such fear has to also be felt by those economists and politicians that allow it.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Greenspan’s Greed and The Federal Deficit

Popular Economics Weekly

The deficit this year is expected to be $514 billion— just 3 percent the size of the economy and significantly less than the $1.4 trillion deficit Congress ran up when it pumped stimulus into the economy in 2009.

“Although the deficit in the Congressional Budget Office’s baseline projections continues to decline as a percentage of GDP in 2015, to 2.6 percent, it then starts to increase again in 2016, reaching 4.0 percent of GDP in 2024,” said the CBO. “That figure for the end of the 10-year projection period is roughly 1 percentage point above the average deficit over the past 40 years relative to the size of the economy.”

Why do we have such a large federal budget deficit today, in spite of the current reductions of CBO projections? It now totals $17 trillion counting the US Treasury’s own debt to itself—when we had 4 consecutive annual surpluses in the Clinton years of 1997 to 2001, and an overall budget deficit reduced to $3.2 trillion in privately-held debt.
The answer in a nutshell is unrestrained human greed, something that even Alan Greenspan recognized, though he wouldn’t admit it was the result of his own laissez faire market ideology of lower taxes and less market regulation.

''It is not that humans have become any more greedy than in generations past,” he famously lamented in 2002 testimony before the Senate Banking Committee. “It is that the avenues to express greed had grown so enormously.”

That quote was not only fatuous—humans have always become more or less greedy depending on those so-called opportunities for greed—but it was his decision to back GW Bush’s deficit spending that erased the Clinton budget surpluses.

Graph: FactCheck.org

There were of course 2 recessions—in 1991 and 1997, plus the wars on terror, plus TARP and the Bush era tax cuts. But it was then Fed Chairman Alan Greenspan’s testimony that enabled the Bush/Cheney record deficits of those and subsequent years such as on January 26, 2001 Senate testimony:

"Continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer term fiscal policy issue of whether the federal government should accumulate large quantities of private -- more technically, nonfederal – assets,” he said at the time. “At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. ... This development should factor materially into the policies you and the administration choose to pursue."

In fact, it was the unregulated greed of Wall Streeters that Greenspan had in fact encouraged in opposing regulation of derivatives—used by regulated banks, as well as unregulated hedge funds—that led to the Great Recession that bankrupted millions.
The Clinton surpluses had almost balanced long-term federal debt, and first Bush Treasury Secretary John O’Neill lost the debate on what to do with that surplus. He had wanted the surplus to strengthen social security, Medicare, and other government spending programs. O’Neill was fired for his opposition to the Bush tax cuts.
In other words, Greenspan gave Bush the cover he needed after 9/11 to use that surplus to finance tax cuts on capital in particular—including abolishing the inheritance tax, lowering capital gains and dividend taxes almost 50 percent—that mainly benefited Wall Street and its investors, rather than Main Street.

“Why did corporate governance checks and balances that served us reasonably well in the past break down?” he asked. “At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community.”

We have you to thank, Dr. Greenspan, for those "opportunities for avarice" that resulted from of your unbridled enthusiasm for such policies at that time. It also brought on the Great Recession and record deficit we have today.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

So Fannie and Freddie Weren’t the Problem…

Popular Economics Weekly

We are learning just how much mortgage fraud was committed by 17 national and international banks and other financial entities that the Federal Housing Finance Authority (FHFA) originally sued to recover some $200 billion in losses to the GSEs that it regulates, Fannie Mae and Freddie Mac.

This tells us where the real faults lies for the credit bubble that led to the housing bubble.  The once private stock corporations and now wards of the government, Fannie Mae and Freddie Mac, didn’t precipitate the housing bust.  They weren’t even the main issuers of faulty mortgages that imploded with the Great Recession. It was the federally-supervised commercial banks themselves that misrepresented many of the mortgages it sold to Fannie and Freddie, thereby giving them the cover of AAA rated assets, when they were much closer to junk bond quality.

Fed Chairman Alan Greenspan had lowered short term interest rates below what was the inflation rate at that time—some 3 percent—whereas his fed funds rate was as low as 0.5 percent.  (That meant if money was lent at below the inflation rate, it was basically free money because inflation would eat away at the amount owed so that it was actually worth less when paid off, or sold, than the face amount of the debt.)

And banks jumped into the housing bubble that resulted, almost ignoring the most basic lending safeguards from such ‘free’ money, such as verifying income and assets of the borrowers that Fannie and Freddie required.  In other words, Fannie and Freddie guaranteed that nothing was “stated” on the loan application that wasn’t verified.

The GSEs themselves were also at fault for allowing mortgage banks such as Countrywide Financial (acquired by Bank of America) to package and sell Mortgage Backed Securities to Fannie and Freddie that mainly consisted of negatively amortized ‘liar’ loans with very low initial payment rates, and little or no income and asset verification.  But that was a small portion of the defaulted loans, and in fact Fannie and Freddie guaranteed mortgages have far and away the lowest default rates.

Wall Street insiders now believe that up to $50B could be the tab to settle all the pending cases, according to the New York Times.  Some $1.96 Trillion in so-called private-label mortgages were issued by banks from 2005 to 2008 during the height of the housing bubble, according to the latest figures.

As of January, the FHFA has settled six of the private-label RMBS cases, recovering nearly $8 billion for taxpayers.  Whether due to a lack of adequate supervision, or outright fraudulent misrepresentation of the credit quality of those mortgages, these banks sold Fannie and Freddie mortgages that didn’t meet the strict credit standards of the GSEs.

Graph: NY Times

Banks such as JP Morgan Chase ($5.1B), Deutsche Bank ($1.9B) and now Credit Suisse ($885B) have settled, while admitting they had inadequate oversight.  But Bank of America and Goldman Sachs are holding out, so are going to trial sometime in midyear 2014. 

Others that have settled include, GE (Ally Bank), United Bank of Switzerland and Citigroup.  They had failed to prove in federal court that the mortgages underlying their Mortgage Backed Securities sold to Fannie and Freddie were due to the busted housing bubble that caused the loss of some $5 Trillion in real estate values, rather than their faulty underwriting practices.

Twelve of the cases remain, including FHFA’s lawsuits against Barclays Bank (BCS), Bank of America (BAC), Credit Suisse Holdings (CS), First Horizon National Corp., Goldman Sachs & Co. (GS), HSBC North America (HSBC), Merrill Lynch & Co., Morgan Stanley (MS), Nomura Holding America (NMR), SG Americas (Societe Generale), The Royal Bank of Scotland Group (RBS) and Countrywide Financial Corp.

So don’t blame Fannie and Freddie for wanting to expand home ownership, as those who oppose government ownership or regulation of anything have contended, and seem to have convinced the Obama administration.  They were as much a victim of deceptive lending practices as the borrowers and homeowners who lost out due to the resulting Great Recession.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fannie Mae/Freddie Mac Dilemma Won’t End Soon

Popular Economics Weekly

The U.S. Treasury is in a bind. Everyone seems to agree that Fannie and Freddie, wards of the government should be downsized, but how to do it without damaging the housing recovery? Extreme conservatives even want to abolish them, along with the Federal Reserve, Departments of Commerce, Education, etc., etc. That isn’t practical, of course—especially abolishing Fannie and Freddie because they currently supply more than 90 percent of all mortgages!

That is one reason even a hint by Fed Chairman Bernanke and others that the Fed might “taper” QE purchases has caused interest rates to rise sharply. Because former Goldman Sachs chief economist Jim O’Neill and others have trumpeted that bond interest rates could reach 4 percent, if and when the Fed slows its QE purchases, returning to “more normal valuations” when the economy does recover.

This in turn means that mortgage rates would return to their recent 6 percent range for conforming 30-year fixed rates, from today’s 4 percent. But that would be devastating to a recovering housing market. Household incomes are still stagnant—in fact have been for the past 30 year, when accounting for inflation.

Keeping interest rates so low has made housing more affordable at these lower income levels. That is the major reason for the Fed’s QE3 buying program.

The Fed has also said unemployment has to fall further, as we have said, and there are few signs that GDP growth will be more than 2 percent this year.

Bond investors also watch inflation, and right now inflation is falling. The Personal Consumption Expenditure Index favored by the Fed is currently 1 percent, which is 1 percent below the Fed’s target of 2 percent. So why would the Fed even begin to “taper” their $85 billion per month in security purchases when neither is happening; and real estate is at the beginning of its recovery?

And sure enough, the Fed has just hinted in a recent Wall Street Journal Op-ed by John Hilsenrath that they aren’t in a hurry to taper their QE3 purchases—just yet. “The Fed, he (Bernanke) said in his March press conference and again at testimony to Congress last month, expects a “considerable” amount of time to pass between ending the bond-buying program and raising short-term rates. He seems likely to press that point at his press conference next week, given that the markets are telling him they don’t believe it.”

“In recent years, the search for yield has gone wider and deeper,” said O’Neill in the same Op-ed. “The resulting deviation from normal valuations has been amplified by the shift of pension funds and insurance companies out of equities into fashionable bonds, and by the lingering effects of the great financial crisis of 2008 and 2009. It seems inevitable that some version of the shock of 1994 is going to happen again.”

What “shock of 1994”? That was when Orange County went bankrupt because then Fed Chairman Greenspan boosted interest rates abruptly in the spring of 1994, after holding them at record lows in 1992-93, to cure the 1991 recession. But Greenspan did it without any warning, which is why Orange County lost so much money betting that interest rates would continue to fall.

So, really the panicked selling of stocks and bonds, and recent rise in interest rates are a sign that economic growth is still fragile, so that even a hint of credit tightening will depress markets. It is the Federal Reserve that is goosing growth, after all, especially in the real estate sector.

As if to corroborate the Fed’s efforts, Southern California home sales were the highest since May 2006, reports DataQuick, The median price paid for all new and resale houses and condos sold in the six-county Southland was $357,000 last month, up 23.1 percent from $290,000 in April 2012, and the highest since June 2008, when the median was $360,000. “What seems obvious is that if prices keep rising fast they’ll cause many more people to list their homes for sale,” said DataQuick President John Walsh.

But that can’t happen if interest rates continue to rise as quickly—and certainly not if they return to more “normal valuations”. So government shouldn’t be in a hurry to downsize Fannie and Freddie, either, since it doesn’t look like Wall Street or the banks are willing to support the housing market without Fannie and Freddie’s help.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

What Will the Federal Reserve Do??

Popular Economics Weekly

Now the fat’s in the fire. Both stocks and bond prices have been falling of late, due to the fear that the Fed will end its $85 billion per month QE purchases of Treasury and mortgage securities too soon. Fed Chairman Bernanke had said that if employment continued to improve, the Fed might begin to “taper” its purchases as soon as its June FOMC meeting.

And today the Bureau of Labor Statistics reported the May unemployment report rose from 7.5 to 7.6 percent because 420,000 more people are looking for work, though 175,000 more payroll jobs were created in May! So what’s the Fed to do? On the face of it, the Fed can’t begin to end QE purchases because its stated goal of 6.5 percent unemployment isn’t close to being reached.

Graph: Calculated Risk

And both inflation indexes and consumer incomes show there is still insufficient demand for more goods and services that would cause the U.S. economy to grow closer to its normal longer term GDP growth rate of 3.5 percent. It grew just 2.2 percent last year, and predictions for 2013 are not much better.

This graph of personal consumption expenditure prices illustrates the problem. Prices have been falling, and when prices fall, so do profits. Hence wages and so employment remains stagnant, stuck where it has essentially been over the past 3 years. Then why are we worried?

Inflation hasn’t been running at the 2 to 2.5 percent average that prevailed before the Great Recession, in other words. Hence those calling for an early exit from QE are doing the country a disservice. It means fewer new jobs and therefore more remaining unemployed. The Bureau of Labor Statistics said some 13.6 million are “marginally attached” to the labor force and still looking for full time work. The unemployment rate for them is an even larger 13.8 percent — down from 13.9 percent in April — if everyone who wants a full-time job but can’t find one is included. Millions of Americans still cannot find work nearly four years after the recession ended.

So who is calling for an early end to QE? No less than Former Fed Chairman Alan Greenspan, for one. "Bond prices have got to fall. Long-term rates have got to rise. The problem, which is going to confront us, is we haven't a clue as to how rapidly that's going to happen. And we must be prepared for a much more rapid rise than is now contemplated in the general economic outlook."

But interest rates generally rise and fall in tandem with inflation, and inflation is still falling. That means getting closer to full employment, which is when inflation historically becomes a problem. So we have a long way to go before worrying about interest rates rising too fast.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Payrolls Rising with Lower Labor Productivity

Popular Economics Weekly

Suddenly it looks like the U.S. economy isn’t stalling. Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate fell slightly to 7.5 percent from 7.6 percent in March, reported the U.S. Bureau of Labor Statistics last Friday. I suspected as much in my April 29 column (Will U.S. Growth Slow in 2012?) due to the large seasonal adjustments deducted from last month’s actual 729,000 increase in payroll jobs.

On top of that, the change in total nonfarm payroll employment for February was revised from +268,000 to +332,000, and the change for March was revised from +88,000 to +138,000. With these revisions, employment gains in February and March combined were 114,000 higher than previously reported.

Graph: Calculated Risk

So maybe the sequester cuts in government spending may not be harming growth as much as predicted—at least for the present. The Congressional Budget Office predicted a loss of up to 750,000 jobs and 1.5 percent in GDP growth in 2013 due to the sequestration cuts.

Why the large revisions to such an important economic indicator? Circumstances may be mirroring that of an earlier era. President Clinton saw some 22 million jobs created during his term, while government spending was reduced due to an earlier cutback in defense spending. The slack was made up by booming exports due to a reduced dollar exchange rate, a more accommodative Fed under Chairman Greenspan, the dot-com bubble that saw a boom in high tech investments, as well as the beginning of the last housing boom that ultimately resulted in the housing bubble.

It may be harder to identify the current growth drivers coming out of this Great Recession. But Fed Chairman Bernanke is pursuing the same business-friendly practices as predecessor Greenspan with record low interest rates and the QE securities’ buying programs that has also boosted exports.

Could it be the high tech, digital replace-workers-with-machines revolution has slowed, along with productivity growth, which means the current workforce has reached the limits of its output, so that hiring has to increase? Nonfarm business productivity rebounded an annualized 0.7 percent, following a decline of 1.7 percent in the fourth quarter. Unit labor costs rose 0.5 percent, following a 4.4 percent jump in the fourth quarter. That is usually a sign of the need for increased hiring, and Q1 seems to have confirmed it. We know the importance of keeping labor costs down, since such costs make up two-thirds of product costs.

Graph: Econoday

So increased hiring is probably why unit labor costs plunged in Q1 2013, which are the costs associated with producing ‘one unit’ of product. Year-ago unit labor costs were up 0.6 percent, compared to 2.0 percent in the fourth quarter. Hourly compensation was up 1.6 percent, following 2.7 percent in the fourth quarter.

More good news was the National Federation of Independent Business (NFIB) report that hiring had increased in the small business sector in particular. "April was another positive, albeit lackluster month for job creation—but small-business owners are expressing a bit more enthusiasm in hiring plans in the months to come”, said NFIB Chief Economist William Dunkelberg. “According to NFIB’s latest data, small employers reported increasing employment an average of 0.14 workers per firm in April. This is a bit lower than March’s reading, but still the fifth positive sequential monthly gain.”

Graph: NFIB

The higher payroll and small business hirings could mean productivity gains for robots and other high tech productivity aids are reaching their limits. It looks like robots can only do so much of the work.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen