Around the Globe 09.17.2013

U.S. Incomes Stabilize for First Time Since Recession – WSJ.com.

Median Income Performance in the U.S. Since 2007

This article tries to show two sides to the news of stagnant median incomes.  First, the article draws a questionable conclusion from the data:

The Census report, viewed as a gauge of American prosperity, could mark a turning point for the recovery: It suggests consumers may soon start to feel the benefits of a steady, if sluggish, pickup in jobs…

The clause after the colon makes the assumption that a steady and sluggish pickup in jobs will create benefits, and this is false.  Strong, robust job growth is required to lift the boats of consumers, nothing less.  When the economy is creating new jobs at a rapid clip, the demand for labor outstrips the supply, raising wages for all workers in the process.

Today’s pace of job growth is enough to allow American consumers to tread water, and there is nothing in the data that suggests that attaining a state of stagnancy marks an inflection point signaling increasing incomes.  The true, parlous state of the labor market is revealed deeper in the article:

  1. Incomes remain 8% below 2007 peaks.
  2. 11 million Americans are still seeking work

The only thing you need to know is that 1 is a direct result of 2.

Consumer Prices in U.S. Rose Less Than Forecast in August – Bloomberg.

U.S. consumer prices muted, but rents and medical costs rise | Reuters.

U.S. Consumer Prices Rose 0.1% – WSJ.com.

US Inflation Rate YoY

When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery.  Today’s monetary easing is based on the theory that this process also works in reverse.  That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth.

Current theory does not account for the diminishing marginal returns of easy money.  Each successive round of monetary easing has  resulted in less benefits inuring to the American people:

Income Growth 99 vs 1

At one time, the Fed’s actions would be expected to lift the economy from its doldrums, but too many years of loose money have taken their toll.  Today, the best we can hope for from additional money printing is stagnancy, which is different from stability.

Home builder confidence hits a pause.

Home Builders Remain Confident, if Cautious – WSJ.com.

Homebuilder Confidence in U.S. Holds at Highest Level Since 2005 – Bloomberg.

Homebuilders Confidence Index

I selected an article each from the Wall Street Journal, Bloomberg.com and CNBC.com for this post about Homebuilder Confidence.  Note how each headline endows the news of a flat index with a positive spin.

The first headline, “Homebuilder Confidence Hits a Pause,” makes a very bullish assumption by characterizing the data as a “pause.”  By using this word, the headline implies that the index will resume its rise.

The WSJ gives a more accurate headline.  The data does tend to show that homebuilders are confident for future prospects but show their underlying caution by not increasing hiring, unfortunately, the article misses a chance to expound on the cognitive dissonance in the results: If homebuilders are really confident, then why aren’t they hiring new workers and expanding production at a faster pace?

The third headline highlights the fact that confidence remains as high as last month, but then this information is not placed into context.  The index remains at historical lows as compared to every other recovery since the 80’s.  This poor showing is despite the fact that this is the fastest, largest increase in the index since its inception.

Low rates spurred increased housing activity, but now that rates have risen the market will only be driven higher if consumer incomes rise, and the evidence indicates that this is a long way off.

Berlusconi postpones message on future after tax conviction | Reuters.

Italy 10yr Bond 09.17.2013

Today, the yield on Italy’s benchmark sovereign bond has once again dropped below Spain’s.  The reason is that Berlusconi is backing off threats to dissolve the government if he is expelled from the Senate.  His inner circle persuaded him that political discord would damage his media holdings.  I am not so sure that he will go away so easily.  He may lie low for a few months, but rest assured Bunga has something up his sleeve.

Advertisements

3 thoughts on “Around the Globe 09.17.2013

  1. I think if anyone had to define the “façade” of the current growth and strength of the US economy in one phrase

    ” LOWERED STANDARDS ” is the phrase.

    The Theory

    ” When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery. Today’s monetary easing is based on the theory that this process also works in reverse. That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth. ”

    This too is theory:

    ” Rising interest rates coincide with an improving economy, meaning increases in funding costs are offset by lower losses on bonds. ”

    Both are probably true IF ALL ELSE STAYS THE SAME But all else is not staying the same.

    The economy is not strong. The economy is artificial.
    The increasing demand comes from LOWERING STANDARDS.
    The rising interest rates do not coincide with an improving economy,
    they coincide with cutting off the artificial printing (TAPER).

    The automobile category is the simplest example.
    Of course it is the example of the absurdity.
    As was the housing market – generated by lowering standards (subprime loans)

    So ridiculous even Bloomberg gets it, but then they don’t get it (as usual).

    http://www.bloomberg.com/news/2013-09-17/subprime-auto-loans-get-larger-as-competition-grows-s-p-says.html

    Subprime auto lenders are enabling buyers to borrow more relative to the cost of a car in a sign that underwriting standards are deteriorating amid increased competition, according to Standard & Poor’s.

    “We’re expecting continued weakening in credit standards as more players vie for a piece of the subprime auto loan market and others try to hold on to market share,” wrote the analysts led by Amy Martin.

    After drying up during the credit crisis, originations of car loans to borrowers with bad credit have almost doubled since the fourth quarter of 2009 to reach $18.4 billion during the same period in 2012, Citigroup Inc. analysts led by Mary Kane in New York said in a Sept. 6 report.

    The increase in subprime originations is fueling growth in the asset-backed bond market, with sales of securities linked to the debt surging 24.4 percent to $14.7 billion through August compared with the same period in 2012, according to Deutsche Bank AG data.

    While loans are becoming more aggressive, most asset-backed deals are still insulated from losses, according to S&P. ”

    = While loans are becoming more aggressive, most asset-backed deals are still insulated from losses, according to S&P. =

    Yeah right, how long will that last.

    Expect another US bailout of the US automobile industry.

    SEE EUROPE Where they are less inclined to lower standards and the
    consumer less inclined to make a risky purchase.

    NYTIMES PARIS European auto sales declined again in August, an industry group reported on Tuesday, erasing a rare gain in July.

    For the first eight months of the year, sales were just 7,841,596 units, the lowest reading for that period since the association began tracking the data in 1990.

    = US uses credit to buy cars – ” British consumers were more willing to use credit for car purchases than their continental counterparts. ” But still buy far less on credit or lease then the US consumers. =

    Long Story Short – the economy is not strong
    the artificial demand is made by lowering standards.
    lowered standards can only last so long.

    A. you can only lower your standards so far
    B. sooner or later those lower standards result in losses when
    the consumer walks on the product and lets it get repossessed.

    Whether that be the car, or the house.

    .

  2. ” Current theory does not account for the diminishing marginal returns of easy money. ”

    The money is lent only through reducing the lending standards.

    Each time you print money there is less and less “good use” for it.
    So IF STANDARDS STAY THE SAME there is less demand for it.

    So each time your print money, you have to reduce standards to have the same demand.

    Over time, If you are lending to people or corporations with less and less good use for it
    and with lower and lower standards,

    of course the returns diminish.

    .

    .

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s