Helicopter Drops Were Successful, and Other Revisions
by Sinclair Noe
DOW + 65 = 16,514
SPX + 7 = 1879
NAS + 39 = 4161
10 YR YLD + .01 = 2.73%
OIL – 1.77 = 101.88
GOLD – 6.60 = 1284.70
SILV - .05 = 19.49
SPX + 7 = 1879
NAS + 39 = 4161
10 YR YLD + .01 = 2.73%
OIL – 1.77 = 101.88
GOLD – 6.60 = 1284.70
SILV - .05 = 19.49
Sales of previously owned homes fell in March for a third
consecutive month as rising prices and a lack of inventory discouraged would-be
buyers. The National Association of Realtors reports closings, which usually
take place a month or two after a contract is signed, fell 0.2% to a 4.59
million annual rate, the lowest level since July 2012. It was the seventh drop
in the last 8 months pushing sales down 8.5% compared with the same month last
year before adjusting for seasonal patterns.
The drop in demand might not lead to a flat-line in home
prices. That’s because one obstacle to lower sales is the low number of homes
on the market. The number of houses for sale at the end of last month rose to
1.99 million compared with 1.93 million a year earlier. At the current pace, it
would take 5.2 months to sell houses compared with 5 months at the end of
February.
There are some positives in the housing market: distressed
sales are down; delinquencies are down; negative equity has declined; and even
though inventory is up slightly, that is a positive because inventory had been
too tight.
The median price of an existing home climbed 7.9% from
March 2013 to $198,500. The appreciation was led by a 12.6% year-to-year
advance in the West, while the Northeast posted a more moderate 3.2% increase.
As prices increased, sales dropped, with the biggest 12-month drop coming in
the West at 13.5%, and the smallest in the Northeast, with a 4.4% decrease.
Million-dollar home sales are on the rise, while deals
for cheaper homes are dropping. In March, sales of single-family existing homes
priced at $1 million and above were up 7.8% from the year-earlier period.
Meanwhile, sales of homes that cost between $100,000 and $250,000 fell 9.9%
over the past year. This might say something about the weak labor market and
eroding income levels; it also speaks to mortgage lending practices, which
remain strict for all but the jumbo market, where standards have eased; and it
screams about the growing divide in America.
Meanwhile, each month Bloomberg conducts a survey of 67 economists
and one of the questions is where yields on the 10-year Treasury note are
headed for the next six months; and the answers have overwhelmingly been that
yields are headed higher. This month’s survey was more than overwhelming, it
was unanimous; 100% say yields will be up by the end of the year. The last time
the survey had that result was in May 2012, when benchmark yields were well
below 2%.
Of course the Federal Reserve has said they intend to
keep their target for Fed Funds rate right at zero; that has been the policy
since the aftermath of the 2008 meltdown and Janet Yellen has let the markets
know that there is no reason to expect a change in the policy “for a
considerable time” after it ends its QE bond buying program, which means no
change until around the Spring of 2015; and even then, it will be dependent on
data showing the economy has improved. So, what has unanimously convinced
economists that yields are going higher, faster than the Fed has plotted? What
is wrong with the current, low interest rate environment?
Fed Governor Jeremy Stein delivered a speech last month
arguing that the Fed should withdraw stimulus or raise interest rates, even if
that means allowing a higher-than-normal unemployment rate, all to prevent the
growth of a bubble in the bond market. Stein points to three things: first, the
rising level of private-sector debt as a percentage of the US economy; second,
narrowing spreads between risk-free Treasuries and corporate bonds; and third,
the growing proportion of corporate debt going to riskier companies, or junk
bonds going to companies that have a greater likelihood of defaulting on their
loans.
Private sector, non-financial debt has now grown to 55%
of gross domestic product. Meanwhile, low rates may have distorted the proper evaluation
of risk; the spread between Baa rated corporate debt and risk-free Treasuries
has dropped. Those spreads were high during the financial crisis but have since
dropped down below pre-crisis levels. Total corporate bond issuance hit $1.3
trillion last year, not just recovering but surpassing pre-crisis levels and a
big chunk of that issuance, $336 billion, is going to junk bonds.
The housing market has seen some recovery, depending on
location, but the latest data on new and existing sales shows a market that is
slowing for now. The market for debt has been expanding much faster than seems
reasonable, and might indicate an area of concern for the Fed. Or maybe the Fed
is realizing that their policy just hasn’t worked and they are now sitting on a
huge balance sheet that can’t be artificially propped up indefinitely.
Meanwhile, the former Fed Chairman Ben Bernanke was
speaking today at the Economic Club of Toronto and he said the Fed could have
done a better job communicating during the financial crisis. He said the public
incorrectly believed the Fed’s emergency-lending programs benefited Wall Street
over Main Street. Bernanke also said, “There will be a time coming soon when
inflation will improve and when central banks will move to a more normal
monetary-policy road.”
Of course, that might be part of the problem; the markets
always expected the Fed to have their helicopter drops directly over Wall
Street and then get back to more normal monetary policy. In other words, the
Fed never truly committed to all out monetary stimulus, and the result was a
prolonged economic slump as the velocity of money slowed to a crawl. Bernanke
would like to say everything worked out for the better, but that wasn’t really
the case.
Bernanke likes to think Fed policies helped Main Street
as much as Wall Street, but we all know better and now we have facts to refute
Bernanke. The New
York Times reports the American middle class is no longer the most affluent
in the world; we have lost that distinction even as the wealthiest Americans
outpace their global peers and most American families are paying a steep price
for high and rising income inequality.
After-tax middle-class incomes in Canada are now higher than
in the United States. The poor in much of Europe earn more than poor Americans.
The data on Europe is a bit tricky as some countries such as Portugal and
Greece have seen income fall sharply in recent years, while other countries,
such as Sweden and the Netherlands have narrowed the gap. One large European
country where income has stagnated over the past 15 years is Germany, but even
poor Germans have fared better than poor Americans.
The struggles of the poor in the United States are even
starker than those of the middle class. A family at the 20th percentile of the
income distribution in this country makes significantly less money than a
similar family in Canada, Sweden, Norway, Finland or the Netherlands.
Thirty-five years ago, the reverse was true. The top 5% of American income
earners still top their global counterparts, and for those well-off families,
the US still represents the world’s most prosperous economy. The US still holds
the title of the world’s richest large country based upon per capita gross
domestic income, but those numbers are averages which don’t capture the
distribution of income.
The results of the 35 year study compiled by LIS
recognize 3 major factors behind the weak income performance in the US. First,
educational attainment in the US has risen far more slowly than in much of the
industrialized world, and especially among younger workers. Literacy, numeracy,
and technology skills of younger Americans have fallen well behind counterparts
in Canada, Australia, Japan, and Scandinavia, and close to those in Italy and
Spain.
Another factor is the distribution of income in the US; it
has been growing faster for the top earners, but shrinking for the middle class
and poor. Yet the American rich pay lower taxes than the rich in many other
places, and the United States does not redistribute as much income to the poor
as other countries do. As a result, inequality in disposable income is sharply
higher in the United States than elsewhere.
So despite Bernanke’s assertions that the Fed helicopter
drops benefitted all American, we know better. And we also know that there are
some policy tools that haven’t been used that could change the situation. The
best place to start would seem to be the financial industry, since this is the
sector that benefitted most from Fed policy and has continued to act as a drain
on the productive economy.
A new IMF analysis found the value of the implicit
government insurance to backstop too big to fail banks, just the idea that the
government would not allow the mega-banks that have been labeled systemically
important would not be allowed to fail, that subsidy is pegged at $50 billion a
year in the US, and about $300 billion a year in the Eurozone.
Maybe the Fed could even act like a regulator and break
up the biggest banks, cut them into small pieces; and in that way, if there was
a failure, it wouldn’t represent a threat to the broader economy; as long as
that threat hangs over our heads, it is hard to accept Bernanke’s assurances
that Fed policy benefits all equally.
