Wednesday, November 27, 2013 - Evangelii Gaudium and Happy Thanksgiving

Evangelii Gaudium and Happy Thanksgiving

by Sinclair Noe

DOW + 24 = 16,097
SPX + 4 = 1807
NAS + 27 = 4044
10 YR YLD + .03 = 2.74%
OIL – 1.40 = 92.28
GOLD – 4.40 = 1238.60
SILV - .11 = 19.80

This has been a quiet week on Wall Street; the two major features have been record highs for the DOW and the S&P and 13 year highs for the Nasdaq, combined with light volume. Now normally, light volume on record highs would be an indication the market has run out of steam and is ready to roll over. But this is a holiday shortened week; the markets are closed tomorrow for Thanksgiving, and then just very, very quiet day on Friday. So, it's difficult to read much into the price and volume other than to say, there is a pause for the holiday.

Happy Thanksgiving.

Plenty to be thankful for; the S&P 500 has climbed 2.8 percent in November, poised for the third straight monthly gain. The S&P 500 is up 27% this year; the Nasdaq is up 33% year to date.

Economic data today shows fewer workers filed applications for unemployment benefits last week; that's a good report for the labor market. The Thomson Reuters/University of Michigan final index of consumer sentiment in November unexpectedly rose to 75.1 from 73.2 a month earlier, and came in higher than expected.

The Conference Board’s index of leading indicators, a gauge of the economic outlook for the next three to six months, rose for a fourth straight month in October.

A separate report showed the government shutdown hurt business confidence, with orders for durable goods dropping 2 percent in October. The MNI Chicago Report business barometer fell less than expected in November.

So, most of the economic data today is positive, but here's a scary little detail still lingering from the financial meltdown days; borrowers are increasingly missing payments on home equity lines of credit, HELOCs, they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks. The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

Data from the credit agency Equifax shows that the number of borrowers missing payments around the 10-year point can double in their eleventh year. When the loans go bad, banks can lose 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks. Even more so, it's a reminder of how everyday people are still digging out from negative equity, paying loans on properties that still are underwater and may be underwater for a long, long time. And of course, there's a ripple effect that keeps the entire economy from reaching escape velocity.

Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611 billion from $346 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising. Fitch Ratings calculates that after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping from $81.25 to $293.16. Yea, that's going to leave a mark.

Maybe the scariest news this week comes from former Federal Reserve chairman Alan Greenspan in an interview with Bloomberg TV claiming the stock market isn't in a bubble. Greenspan said: “This does not have the characteristics, as far as I’m concerned, of a stock market bubble.” Greenspan said that even with the rise in equities, the US economy is restrained by a “degree of uncertainty” that is reducing investment. Based upon past performance, which is not an indication of future results, Greenspan may be the ultimate contrarian indicator.

As a side note, Greenspan was asked about the major policy announcement from Pope Francis this week denouncing unfettered capitalism. Greenspan declined to comment.

The Pope's “apostolic exhortation” may be the most important news, not just of the week, but in a very long time. You don't have to be Catholic to understand the importance of this policy statement from the Pope, just look at the numbers. There are about 7.2 billion people in the world; about 2.4 billion are considered Christians, about 1.3 are Roman Catholics, and there are about 250 million more Eastern Orthodox. That makes Roman Catholics, by an overwhelming margin, the largest denomination of any religion on the planet. And Pope Francis is the leader of this massive flock.

And the Pope is now talking about the “new idolatry of money”, writing:

The worship of the ancient golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings.

His thoughts on income inequality are searing:

How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality.

The pope's writing on "the economy of exclusion and inequality" might disappoint those who considers themselves free-market capitalists, but they would do well to listen to the message. And many of those free-market capitalists are Catholics. How can they reconcile their business with their faith?

Income inequality has been growing in the US since the 1970s. Nearly all of us are likely to experience it in some form or another. Income inequality is not someone else's problem. In the discussions of why the US is not recovering, economists often mention metrics like economic growth and housing. They rarely mention the metrics that directly tell us we are failing our economic goals, like poverty and starvation. Those metrics of income inequality tell an accurate story of the depth of our economic malaise that new-home sales can't. One-fifth of Americans, or 47 million people, are on food stamps; 50% of children born to single mothers live in poverty; and over 13 million people are out of work. And for the first time in our nation's history, children are now less likely to do as well as their parents.

The bottom line, which Pope Francis correctly identifies, is that inequality is the biggest economic issue of our time - for everyone, not just the poor. Nearly any major economic metric - unemployment, growth, consumer confidence - comes down to the fact that the vast majority of Americans are struggling in some way. You don't have to begrudge the rich their fortunes or ask for redistribution. It's just hard to justify ignoring the financial problems of 47 million people who don't have enough to eat. Until they have enough money to fill their pantries, we won't have a widespread economic recovery. You can't have a recovery if one-sixth of the world's economically leading country is eating on $1.50 a day.

It's only surprising that it took so long for anyone - in this case, Pope Francis - to become the first globally prominent figure to figure this out and bring attention to income inequality. And it is an issue that is not going away.

Happy Thanksgiving, and don't forget all the things you are thankful for. 

If you would like to read the apostolic exhortation, Evangelii Gaudium, here is the link.