A Holiday Gift From the Feds This Year

So Bloomberg is referring to Yellen now as a "Decemberist," suggesting a rate hike is not likely in the offing until the end of the year. 

http://www.bloomberg.com/news/articles/2015-06-18/three-hints-yellen-dropped-that-the-fed-might-not-raise-rates-in-September

So first we were looking at one in June and one later in the year, and then none in June but pretty sure one in September, and now we are thinking maybe December, with two of 17 fed members against any this year.  Looks like my prediction of no increase this year - and probably none next year -that I made back in April is looking pretty good at the moment.  Mind you, I said back then they should do an increase - and should have years ago - but given their Keynesian thinking and the direction of things economically I did not see it in the cards then and do not see it in them now.

Of course, with the Nasdaq setting new records today, I guess never say never, but that was in no small part due to the Fed standing pat for longer, so unlikely a market reaction to the "good" news from the Fed is going to cause the Fed to change its tune.  I do not see the stock rise lasting too long either way.  The DAX in Germany is in an official correction (albeit only back to levels seen in February and still over 10% over where it started the year),  and China markets are having the worst weekly drop in six years, so things are starting to pop.  Just a matter of time my friends, just a matter of time.

Hot News - Greece Economy Has Prospered Due To Its EU Membership!

So the Bank of Greece, which notably is not under Greek Government control but rather is more closely aligned to the ECB, submitted a monetary policy report to the Greek Cabinet and Parliament this morning.  While its message is clear, I am not so clear on where the Bank of Greece gets the support for one line in it.  I will not spoil the suspense for you.  Go ahead and see if you can figure out for yourself which line confuses me:

"As the Bank of Greece had assessed in its Governor’s Report for the year 2014, the conclusion of a new agreement with our partners is of the utmost importance to fend off the immediate risks to the economy, reduce uncertainty and ensure a sustainable growth outlook for Greece.

Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.

This is why the Bank of Greece firmly believes that striking an agreement with our partners is a historical imperative that we cannot afford to ignore."

Figure out yet the line that confuses me?  I think you have.

Let's consider a few stats and see if we all agree.  The EU was formed in late 1993.  Around that time the Greece unemployment rate was hovering around 9%, which is not great but it is much better than where it is today at around 25%.  At the time the EU was formed Greek government debt to GDP ratio was under 80% and now is well over twice that, pushing 180%.  Indeed, even before the great recession they were already over 100%, so you cannot blame it all on the recession.  Private sector debt as a percentage of GDP has also more than doubled. 

We could go on, but there is plenty of press out there about how bleak the situation is in Greece today.  And let me add that if it were not part of the EU it would not have to face collective creditor demands on austerity and could have negotiated bigger haircuts long ago in my view, or at least dealt with the debt by devaluing its currency and incurring some short term high inflation, kind of like Iceland did, which the IMF, one of Greece's creditors, cites as exemplar.  But hey, with things going so swimmingly in the EU, why would they ever want to do that.

I Shall Not, Will Not, Promise Not To Talk About That Place . . . You Know, That Birthplace of Democracy Place

All you read these days is that birthplace of democracy place defaulting, capital controls, Tsiprais this, Troika that, IMF wants this, ECB demands that, does Merkel's hair ever move, etc.  I am personally tired of it all, so I am absolutely not, no way, no how, going to talk about it. 

Let's instead talk about some of the other PIIGS, shall we.  Nothing substantive other than to note they are increasing their public debt and debt to GDP ratios at an alarming rate:

http://www.zerohedge.com/news/2015-06-16/there-one-problem-europes-so-called-austerity

So me thinks they may ultimately follow the lead of that other country, you know the one I promised not to mention, and do their own version of Grexit.  Sure, they will wait and see how that works for you know who, but assuming after a couple of years of extreme pain it looks like a smart move, they might start scratching the old backside and considering options.  But rather than speculate, let's just assume that they do and try to come up with some catchy names for it, like Grexit.  

We begin with Portugal.  If you have any thoughts on this just leave a comment.  I am thinking:

Portugo

Leaving Port

Port - a - potty

Porting Ways

Not really happy with any of these, so please help.  Let's try Spain instead, which is also a tough one:

Spain't-here-no-more

Spain't-going-to-take-it-any-more

Spexit

Spandexit

I like the last one though it is a bit of a stretch (okay, I really am digging)  Last but not least, we come to Italy:

Ciao

Italbegoinnow

Quitaly

Exitaly

Certainly the last couple have some promise. Oh, you disagree?  So you think this is easy do ya? Well, go ahead then, see what you can come up with.

Meanwhile, I will go back to not talking about Gree . . . oops, that was close.

June 20th Update

Lest you think I jest at the suggestion other countries might follow the Grexit lead, you should start following some European election results.  Seems a bit of frustration brewing with the whole EU thingy.

http://globaleconomicanalysis.blogspot.com/2015/06/euroskeptics-to-form-government-in_19.html

Who would have seen that coming? (though I did mention like six years ago here that the U was ultimately leaving the EU, a forecast that was not well received at the time.)

http://financialspiltmilk.blogspot.com/2011/09/eu_25.html

A monetary union without a fiscal union is not a good combination.

China Briefly

I posted in January and again on February on some of the problems in China that make the problems here in the U.S. look a tad minor.  At the time China had lowered 2015 forecasts to 7% growth, when servicing its debt load arguably would take over 20% growth to properly manage.  They are now looking at around 5% and the trend is certainly in the wrong direction.  With suffering real estate, huge debt, a vastly over-valued stock market and a host of other issues, it is not looking good.  Even Bloomberg is pessimistic about it:

http://www.bloombergview.com/articles/2015-06-02/china-after-the-bubble

Anyone know Chinese for watch out below?

Good News Monday!

Hey, I can do two days of good news in a row if I want to, so get over it.  I have some good news to share today too.

Is it the ISM Manufacturing Index rising and beating expectations?  Nope.

Is it construction spending surging to its highest level in over six years?  Nah

http://www.cnbc.com/id/102721689

Could it be the hot dream I had last night?  Oops, strike that, wrong blog.

Okay, I'll tell you.  It is the flat, or if you are looking YOY, dropping, consumer spending.  Yeah!! 

http://www.zerohedge.com/news/2015-06-01/may-consumer-spending-has-biggest-annual-drop-great-financial-crisis-gallup-survey-f

Waaaiittt a minute, those econ 101 minds in the Keynesian crowd are now saying, isn't that bad?  Well, that depends on your perspective.  Incomes were up .4% and spending was flat which led the brains on Bloomberg to openly question where the money is going. 

http://www.bloomberg.com/news/videos/2015-06-01/consumer-spending-stalls-as-april-incomes-rise-0-4-

One posited "Maybe its going to savings?"  Ding, ding, ding.  Yes, consumers are over-leveraged and using what little gains they have in income to pay down debts and save, which is a painful process that is very long over due.  Debt levels are way too high and pushing folks to spend more and incur more debt in this situation is not the answer.  We need a freakin' correction and the Fed has to stop meddling and preventing the inevitable.  They are only making it much worse in the long run.  So it is not the central bank think tanks solving the situation but us lowly consumers.  Probably too little and too late, but we have to start somewhere.

Don't believe me, read this from David Stockman who has been studying this stuff since long before me back to when he was Regan's Budget Director and before.  He explains it much better than I ever could.

http://davidstockmanscontracorner.com/from-whence-cometh-our-wealth-the-peoples-labor-or-the-feds-printing-press/

I will highlight here for you what I took as the best explanation in the whole piece, which as always for him is well written, well researched and witty:

"But here’s the insidious thing.  There is no such thing as “aggregate demand” which is separate and apart from production and income. The only way an economy can spend more than it produces is to finance excess consumption from artificially conjured credit.  But even that can work only so long as balance sheets have available runway and the servicing cost of higher leverage does not overtax the carrying capacity of current incomes.

Well, that is exactly what has happened. The US economy hit peak household debt at the time of the crisis. Central bank fueled credit expansion was a one time parlor trick. During the decades leading up to the great financial crisis, household leverage levels were ratcheted higher and higher during each stimulus cycle.

To be sure, that did generate the illusion of growth. But it wasn’t sustainable. Accordingly, the tepid growth rate since the pre-crisis peak——that is, just a 1.0% annualized gain in real final sales for the last eight years—-simply represents the limits of a production and supply-side constrained economy."

And with these fine words I bid you good night!  Perhaps we will have a Good News Tuesday tomorrow (or at least another great dream tonight).

Good News Sunday!

There is plenty of negative news to ponder, but how many times do you really want to talk about Greece, 1st quarter GDP rearcasts lowered to -.7%, the Chicago debt load, China and European stocks down, etc.  Let's take a break today and talk about some good news for a change.  After all, with the ISM Manufacturing Index and April numbers for personal income and outlays out tomorrow, I am sure there will be plenty of the nasty things to talk about later this week.

Let's start with hotels.  The hotel business in the U.S. is booming.  Occupancy rates for April were THE BEST APRIL EVER!

http://www.calculatedriskblog.com/2015/05/hotels-best-april-ever.html

And I cannot really figure out why.  Consumers are not exactly being bullish otherwise and it is not like a lot of foreigners from Greece are visiting to take advantage of the bad exchange rate, so I am scratching my head (or other parts).  Either way, it is good news and hiring for hotel staff, restaurants and the like is one of the bright spots in the hiring picture, so definitely a good thing.

And speaking of restaurants, the Restaurant Performance Index has been doing fairly well also.

http://www.calculatedriskblog.com/2015/05/restaurant-performance-index-increased.html

People have got to eat and eat they shall.  Apparently all those folks staying in hotels are eating out at restaurants.

Banks are also okey dokey.  The list of "problem banks"  is down to 324, a nice hefty 35% drop from just a year ago. 

http://www.calculatedriskblog.com/2015/05/may-2015-unofficial-problem-bank-list.html

And so, this fine Sunday paints a glorious, upbeat, bright - I want to live there - kind of future (until tomorrow).

Build It and They Will Come . . .

Well, housing starts just had a rousing month, coming it at a 1.14 million annualized rate, a very nice 20% climb from March.  Yep, lots of homes being built.

http://www.bloomberg.com/news/articles/2015-05-19/housing-starts-in-u-s-surge-to-seven-year-high-permits-climb

Mind you, I said built, not sold.  And you can see why they are building.  The NAHB has high expectations for the future this year, though current consumer traffic seems to be a tad lacking at the moment. 

http://www.zerohedge.com/news/2015-05-18/homebuilder-sentiment-slides-misses-5th-last-6-months

We will see what happens when NAHB expectations run face forward into reality.  For reality is that folks these days simply aren't in the home buying mood.  Home ownership rates are over 5% off their peak and the lowest they have been in 25 years:

http://www.cnbc.com/id/102627205

Yet this is with record low mortgage rates, so what gives?  Could it be that baby boomers are retiring, empty nesters and/or switching to lower paying part time jobs (willingly or not) and are downsizing or choosing to rent?  Could it be that median incomes, adjusted for inflation, are down 10% since 2000 and housing prices, also adjusted for inflation, are up 20%?  Could it be that young people with no job security are choosing to not load up with so much debt, especially after seeing the bubble burst in 2008 with massive foreclosures and the like?  Could it be builders have given in to the heroin epidemic and simply have no idea what is going on?  You choose.  Either way, not likely to have a happy ending.

And yet the rosy numbers will undoubtedly boost 2nd Quarter GDP forecasts (not reality, just forecasts).  The Atlanta Fed just increased its 2nd quarter forecast from .6 to .7% annualized.  Notably the Atlanta Fed GDP Now forecast is still well below the blue chip consensus that is close to 3%, but these blue chip forecasts are as reliable as, well, NAHB forecasts.  And so, with optimistic economic numbers, comes a stock market pretty much stuck at even.  Torn between good housing numbers on one hand and a Fed looking for such rosy news to justify an increase in rates on the other.  Yes, good news is bad and bad news is good.  Welcome to the new economy.

May 21 Update

I posted the above a couple of days ago and now it all becomes clear to me.  You see, today the sales numbers for existing homes came in and they were - shockingly - below forecast.

http://globaleconomicanalysis.blogspot.com/2015/05/existing-home-sales-lower-than-any.html

So that explains it.  All these builders are optimistic and building new homes because people have  suddenly decided to start buying new houses instead of existing houses.  I apparently still have a lot to learn on this economics stuff cause I really did not see that coming.  How obvious that sales on new homes will undoubtedly be going up if sales on existing homes are going down.  Just saying it out loud makes me wonder how I did not see that before.  And now the other correlations are becoming clearer as well; incomes down, spending up; full time jobs down, employment up; house prices up, house demand down; bad news reported, stock prices up.  It all makes sense and I can see clearly now, the rain is gone.  I can see all obstacles in my way . . .