The recovery narrative counted on a new housing boom to propel the U.S. into strong sustainable growth, but it looks like the boom, actually Housing Bubble 2.0, is running out of steam. Our chart illustrates the relationship between housing sales and the mortgage rate with a six month lead for the rate.
A recent survey confirms that the housing market is slowing down. From “New Home Sales Not So August:”
- There was a 4% decline in new home sales from July.
- 5% of sellers were forced the lower prices, the highest level in 18 months
- Realtors’ expectations of buyer traffic missed for the first time since December of 2011.
Rising rates and stagnant incomes will continue to weigh on housing demand for the immediate future despite what people wish to believe.
Two of the recurrent themes of this blog are that cheap money benefits the rich to the detriment of the rest of us and that there are diminishing marginal returns with each successive iteration of monetary easing . The table above succinctly supports each case.
Observe how the 1% grabs an increasing share of income as monetary easing becomes more drastic. During the Clinton boom, the Fed maintained a tight policy until 1998 when it loosened in response to the Long Term Capital Management crisis and trouble with the Asian Tigers. The Bush Boom was created by a very low interest rates in the wake of the bursting stock market bubble and 9/11, while the current “recovery” is a child of not just low interest rates, but zero bound rates plus trillions in money printing to purchase Federal debt and mortgage bonds from TBTF banks, hedge funds and rich investors.
The mostly organic Clinton boom logged the best numbers for both the 99% and 1% racking up an overall 31.6% income increase with 45% of the gains accruing to the rich. During the Bush boom fed by cheaper money, the overall income increase is a mere 16.1% with the rich capturing 65% of the gains. The current economic “recovery” is being fueled by the cheapest money: not only has the Fed reduced the operating costs of the TBTF banks with ZIRP but it is also bailing them out of their poor investments by purchasing mortgage bonds driving up the price markedly since 2009. Income has only recovered about 6% with the rich taking home 95% of that gain.
Note the pattern: each successive expansion is about half as strong as its predecessor, income growth of 31.6% declining to 16.1% and then to 6.0%. Moreover, each wave of monetary easing results in a higher percentage of income gains benefiting the 1%, increasing about 50% from expansion to expansion, 45% to 65% to 95%.
Intriguingly, even though the rich are receiving most of the gains today, everyone is worse off due to excessive liquidity with income gains decreasing across-the-board. Perhaps, this is the real reason that the Fed is preparing to taper.
Today, we have already covered two reasons why the American recovery will continue to be tepid, the end of Housing Bubble 2.0 and the diminishing marginal returns of more debt. Add another to the list—Moody’s Analytics just declared that recession risk has disappeared in all 50 states. These are the same people that declared a bottom to the housing market 2008 and completely missed both the GFC and Great Recession and continue to slap on AAA on just about any paper presented to them by the TBTF banks.
Even though MA is a separate unit from the rating agency, this is a conflict of interest. The same company that rates municipal debt is touting the economic health of the issuers, so take their guidance with a grain or two of salt and check out the Citibank Economic Surprise Index crossing into negative territory illustrated above. Housing headwinds, ineffective monetary policy, flat incomes and now less surprises indicate a bumpy road lies ahead.
In May, China’s new leaders decided to crack down on the various methods that the Chinese were circumventing the various methods that the PBOC and government use to the control the financial markets. The crackdown quickly metastasized into a full-blown liquidity crisis, which the authorities managed to get under control in early July.
At first, the government seemed willing to tolerate high rates and plunging liquidity in a bid to move to a more sustainable growth model. Once they realized, that they were heading into a full-blown financial crisis, the appetite for reform quickly dissipated. Now, it seems that China will allow additional leverage in order to maintain a 7.5% growth rate. Eventually, additional credit will fail to budge growth rates. How high will it go before then?
Greece does not need two more aid packages. The country is now a ward of the Eurozone and will require periodic cash payments to remain afloat until it is freed from its giant debt pile. Greece currently maintains a debt-to-GDP ration of 156% and rising.
In order for it to knock debt levels down to reasonable levels within a decade, it would have to accomplish two impossible goals. It would have to grow its economy by 7% a year for the next 10 years while delivering a balanced budget every year to reduce the ratio to just under 80%, about German levels.
Based on what we have witnessed since 2009, what are the chances that Greece attains a Chinese 7% real growth rate while balancing a budget that has a deficit of 10% of GDP? Well, those are your chances of the Eurozone being able to cease aid. As long as Greece can’t pay its bills, the Eurozone must pick up the tab. Remember this when commentators begin breathlessly discussing primary surpluses.