Two Conflicting Views of May Housing Starts and Permits

Bloomberg: Housing starts in U.S. beat 1 million pace for second month…indicating the industry is picking up this quarter after a weather-induced slump to start the year.”

Zero Hedge: “May housing starts and permits was very disappointing. Both missed expectations and tumbled from previous month by the most since January”

Which one is correct? 

Bloomberg: http://tinyurl.com/pzlegd7 or 

Zero Hedge: http://tinyurl.com/ky7l2xv

Monthly Jobs Report

USA Today: "U.S. Economy Regains All the Jobs Lost In Recession" 8.7 million lost and 8.8 million jobs gained since recession began. USA Today article

But with so many people unemployed, how can this be?

Here is some context from Contra Corner: "What The Bubblevision Revelers Missed." David Stockman's Contra Corner

War Is Good

New York Times: "Lack of major war may be hurting economic growth"

Question: Could this be true?

Under our Keynesian ecnomic system, used by both political parties, this headline/thought seems normal. How? Because we measure GDP (the economy) by the consumption of wealth rather than the production of wealth, it must be that manufacturing munitions and using them to blow up people and wealth is a way to generate economic growth.

Read the article here

Is Our Economic Growth Rate Rising Or Falling?

Current expectations say the economy (as represented by GDP) is recovering slowly but that growth will rise in the second half of the year; yet economic data points in the opposite direction. Which view is correct?


In the short-term, expectations are what drives the market. Current expectations assume that the “gap” in demand (consumer spending) can be filled by enough government spending; and that the markets (securities and housing) can be levitated by the Federal Reserve pumping $100 billion per month into banks to keep mortgage rates low and allow the banks to invest in equities etc.) Then, when the markets rise, housing prices rise and the spending gap is filled, the government and the Fed can begin withdraw money from the economy and raise interest rates. This “improving economy” story is told and repeated 24/7.

When a negative data point comes along like the jobs report on Friday (expectations of adding 193,000 jobs turns out to be 88,000 jobs on a model adjusted basis); they report the headline but focus on a single positive data point within the report like hours increased 0.1% and extrapolate from that single data point that things are still improving. They do the opposite when the headline number meets expectations like the prior months jobs report and ignore the underlying data points like the huge number of those jobs that were part-time, low-pay and no benefit jobs.

Net: current status quo maintained.

In the long-term, expectations will have to adjust to reality. This recession is not the result of an “inventory correction cycle” (prices rising faster than supply); this recession was caused by a debt cycle (debt rising faster than incomes.) Therefore, to get back on track, we have to reduce debt (sovereign, corporate and personal) to not only sustainable levels, but to levels where credit expansion can take place again. So, in the long-term, expectations are that economic growth is falling.

Net: the market is very short-term oriented; therefore, you must be positioned both positively and negatively.

Governments Are Destroying The Pillar Holding Up Their Recovery Plans

March 19, 2013

The major reason the market is moving up while the economy is moving -at best- sideways is the confidence America has in its political leaders to do the right thing, to solve our economic problems. Our politicians, our economists and the media have sold us on the expectation that we are out of recession, slowly recovering now but recovery will speed up in the second half of the year. The market trades on expectation.


If we loose confidence in our political leaders to do the right thing, expectations will change dramatically.

Yet, at the same time, they don't seem to know or think or care what we think as long as they can keep the status quo until the next must win election. What happened in Cypress this weekend is important because we are globally connected. It is an example of destroying the rule of law and destroying confidence in the government. The President of Cypress two weeks ago said the government would not even discuss an asset tax. Then on Friday night, the ATM's are shut off (to protect the banks) and news of the asset tax spread, person to person, by Twitter.

We have seen act after act in Europe where the government has stated one thing and done another. We are doing the same thing here: the continuous bailout of the banks, the disregard for the law in the GM bankruptcy, the crony capitalism, the fake hysteria over a small increase in budget (also known as sequester.)

If our politicians do not face the real cause of our problems, and stop treating the symptoms, we will loose confidence and the assumptions we have now will have to change and it may not be for the better.

What Does $145 Million Per Hour Buy?

 March 11, 2013

If you though the President and Congress were spending a lot of money ($3.6 trillion per year), you may not realize that the Federal Reserve (Chairman Bernanke et. al.) is also printing and distributing $147 million dollars per hour 24/7 to the major banks (including foreign banks with domestic branches).


The banks are using this money to increase assets, reduce reserve requirements and buy assets (including equities, bonds and commodities). This is one way to help the banks and lift the stock market which then reinforces the assumption that we are out of recession and the economy is growing.

This program (increase debt to get out of debt) by the Federal Reserve is being touted by government economists and most of the media as courageous and beneficial. Here is what it brought us in the 4th quarter. Federal Reserve spending over $300 billion, GDP up $5 billion and a growth rate of 0.01%.

Stay on your toes,

More Of The Same

February 13, 2013

Opinion

The President's message last night was, as expected, simply more of the same: More spending and more taxes.

It was expected because the presumptive opinion in America (as defined by politicians, economists and the media) is that the government will find a way to deal with our problems -whatever they are- and that we do not need to worry.

This view, made popular during FDR's reign and reinforced and expanded since by both political parties, believe that the government can and should inject itself into the economy because the economy needs to be managed. That market forces cannot do the job.

The president said we need to do more. I interpret that to mean we need to take more money from the people who earned it, the producers, because the 50-60+% percent being taken now isn't enough or even fair. And besides, the government knows how to spend this money better than the people who earned it.

You may think differently but right now we live, work and invest in this Keynesian world; therefore, going forward we can expect the following:

1. Governments (all levels) will continue to spend excessively and borrow or print more money because there is no incentive to stop (see ZIRP below.) When the States get into trouble, they believe the Federal Government will bail them out.

2. The Federal Reserve will continue their Zero Interest Rate Program (ZIRP) for as long as they can to help banks (it's their job); and to keep interest rates low to "help" people buy/refinance their homes. And maybe one other thing, the Federal Government can't afford to have rates rise because every 1% rise in interest rates will cost the government over $150 billion per year in additional interest.

3. Currently, the Federal Government is running close to $100 billion per month in deficit spending and the Federal Reserve is printing and pumping in another $105 billion per month. The results so far are not too good however. Preliminary Fourth Quarter GDP decreased at an annual rate of -0.1%. But, it's only been four years.

4. Normally, increasing money supply causes inflation. However, even with the trillions of dollars injected into the economy, we do not see inflation as measured by the Consumer Price Index (CPI.) One reason is of course the way CPI is calculated. The other is that the money being injected by the Fed is going directly into the banks. The banks are not lending the money because they can make more money by buying assets (stocks, bonds, currencies, foreign investments, etc.)  

4. Therefore, we have a kind of stealth inflation because real inflation is not visible in the usual places. However, inflation is visible in asset prices (stocks, bonds, metals, etc.) because that is where the banks are "investing" their free or almost free money from the Fed.

5. This kind of malinvestments will eventually cause "cost-push inflation" (increased costs of materials including energy and labor will force prices up and thereby reduce supply.) Reduced supply then causes prices to increase.

6. Today, the government cannot raise rates to combat rising prices (remember Paul Volker) because U.S. debt is too large and interest on the debt would become unaffordable. Nominal rates on the 10-year Treasury of 5% would increase interest payments close to the size of the Defense budget.

So what do we know after the President's speech? The government is going to keep pumping money into the economy raising nominal GDP, asset prices (including the markets) and inflation. We will need to continue investing like a Keynesian whether you believe in this dogma or not, but keep an eye out for the black swan.