The mainstream financial enjoys reporting simplistic explanations for complex trends. The MFP explanation of the month is the “shutdown.” Negative data is explained away by the shutdown, while positive data is used to reinforce the recovery narrative. A more nuanced reading of the data reveals two facts. First, initial unemployment claims have dropped to business cycle lows. Second, claims had begun rising in the beginning of September long before the latest government manufactured crisis.
The pace of layoffs has slowed throughout 2013 after remaining static through 2012. it seems that initial claims have finally bottomed out over four years since the “end” of the recession, but hiring remains weak. Last month a mere 148,000 jobs were created well under the 200,000 necessary to maintain pace with new entrants to the labor force.
Shiller does not believe that the country is in the midst of a housing bubble and this is his thinking:
“I define a bubble as a time when people have extravagant expectations, and the expectations are driving home price increases,” said Robert Shiller, Case-Shiller index co-founder and Yale University professor of economics, in an interview with CNBC. “We don’t have the mindset of earlier this century.”
What Shiller is saying is that price expectations are different now than in 2006. This is true, but the background economic picture has also changed with these expectations. In 2006, people believed that house prices will continue rising as rates remained low and consumer incomes were growing. Today, people believe that house prices will continue rising despite rising rates and stagnant consumer incomes. Isn’t today’s market just as irrational as 2006 once we take those facts into account?
These headwinds will buffet housing going forward resulting in declining sales. Moreover, once investors realize that there is no money to be made in renting hundreds of single family home due to the lack of economies of scale in the sector, expect a housing correction to a lower sales pace at lower prices.
An unbalanced economy is a weak economy. The old cliché is, “Neither a borrower or lender shall be,” not “A borrower shall not be, but lenders are fine.”
Export-driven economies rely on a weak currency to flood the market with their goods and thereby place two burdens upon their populations. The cheap currency makes imports more expensive, so consumers in export-driven economies cannot afford as much. Lower consumption levels equate to lower employment levels as the infrastructure of consumption remains lacking.
Prices for consumer goods are much higher in export countries. In the U.S., you can buy a nice HDTV and a surround sound system for about $1500. In Germany or the Netherlands, you couldn’t even buy the HDTV for that price. As a consequence, the retail sector remains small and labor force participation rates remain low.
As the chart illustrates, Germany receives a very nice benefit from belonging to a currency zone with more unproductive members, and those countries pay a steep premium to remain in the Eurozone. Eventually, someone will figure out that he could reverse his country’s fortunes rapidly by reverting to its national currency. Until then, the periphery will struggle, and breakup risk will persist. He who exits first, exits best.
Draghi better fire up the printing press before it is too late. The Eurozone “Recovery” has been led by a surge in exports from the periphery. While the employment picture is still deteriorating, at least higher export orders were a bright spot. Unfortunately, this brief upswing in exports is about to reverse course. The Euro has been depreciating as the ECB neglects to match the Fed, the BoJ and the BoE in currency creation. Our chart illustrates the relationship between the Fed and ECB balance sheets and the USDEUR exchange rate. The present ratio indicates a rate of $1.54. The strong euro has already begun to weigh on PMIs and will filter down to GDP in due course.