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 . . .

"Bernanke Admits He Couldn't Get It Up Either"

This, my friends, is the quote of the year so far.  I love it and it relates to the poor GDP numbers that came out last week for the first quarter.  It is taken from the Daily Reckoning, which you can find here:

http://dailyreckoning.com/

The article is also worth quoting, so here it is:

"Since yesterday, we’ve had “getting it up” on our mind.

 The “it” here is GDP growth. And the “we” is the economy. You’re invited to use your imagination to deal in these silly abstractions for the length of this reckoning.

 As stated, we’ve tried everything. TARP... QE I... QE II... QE III... ZIRP... NIRP... PIRP... “FoGu”... The Federal Reserve has hosted Ph.D. trysts and ogled economic models...  And what was the harsh verdict passed down?  That there’s no little blue pill to pop… no horny goat weed to ingest… that will give the economy a strong, exciting lift.

 Here’s Ben Bernanke, blogging about his own experience with persistent floppiness this morning at the Brookings Institution:

“Growth in output has been slow, despite solid job creation…

“But nobody claims that monetary policy can do much about productivity growth... I agree that monetary policy is no panacea, and as Fed chairman I frequently said so. With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times.”

No kidding! At what final price, we wonder, will he and his ilk have learned that lesson?

Bernanke, like so many other power elites, operates under the prevailing Keynesian paradigm. As an economics student of the ’60s, he was molded by it. As a professor, Fed chairman and now blogger, he has perpetuated it.

The current paradigm holds that promoting consumption instead of production is the path to prosperity. And prosperity, according to the paradigm, is measured by GDP.

Our co-founders Bill Bonner and Addison Wiggin stood in awe of these bad ideas in Empire of Debt, published in 2006:

“As the Anglo-Saxon economies lost their competitive edge in manufacturing, the tried to make up for it by encouraging consumption. This is the biggest fraud of all. At first, higher consumption feels good. It is like burning the furniture to keep warm; it feels good for a moment. But the sense of well-being is extremely short-lived.

When people borrow and spend, they feel as though they are getting richer -- especially when their houses are rising in price. The increased consumption even shows up, indirectly, in the GDP figures as growth. But you don’t really become wealthier by consuming. You become wealthier by making things you can sell to others -- at a profit. The point is obvious, but at this stage of imperial finance, it was inconvenient.”

If the current paradigm were correct -- which it’s not -- there might’ve been reason to celebrate this morning. Namely, the consumer spending data, out this morning. “Nearly every month for the past year, personal incomes have been growing at a faster clip than consumer spending” explained our colleague Dave Gonigam in this afternoon’s 5 Min. Forecast.

 “Whatever money comes their way, people have been trying to squirrel some of it away or pay down debt. But not in March. Personal income was flat, while consumer spending grew 0.4%.” Even then, says Dave, “the year-over-year figures still show income growing faster than spending.” That’s probably a tough fact for Yellen and co. to swallow.

 But “what really scares the Fed,” adds Jim Rickards, “is that nominal GDP is less than real GDP. Since debt is repaid in nominal dollars, things are much worse than they look.” Deflation’s a beech.

 Alas, it will take more than deflation -- however scary it is -- to overturn mainstream economic thinking. As Jim reckoned yesterday, reaching a paradigm shift is a slow, ponderous lurch. Bad ideas are as resilient as, if not more resilient than, Keith Richards.

 The best you can do while you wait is invest accordingly and laugh as the parade goes by."

And I am going out on a limb here (a very structurally sound limb in my view) and predicting that the second quarter GDP will be worse than the first.  What, no snow storms to point at, no port disruptions, and the dollar is weakening now but I have the gall  to make such a silly prediction!?  Yes I do, because these "causes" of  the low GDP in the first quarter were minimal influences.  An economy on the precipice of recession (if not already in one) is the real cause and it is starting to show more of its ugly face every day.  I note the Atlanta Fed started its 2nd quarter GDP forecast April 30th with an "Initial Nowcast" of .9.  Go ahead, ask me.  How long did it take for number that to start to come down you ask?  Well, I am glad you finally asked.  All of one day.  With less than glowing ISM manufacturing numbers it dropped to .8 on May 1. 

International trade numbers are out tomorrow and may move it slightly again, but the real number to wait for will come May 14 when the retail trade and inventories numbers come in.  Had it not been for a vast inventory buildup, first quarter GDP would have been negative around -2.5%.  And last I checked, retail ain't retailing so much.  Just a few store closings have been announced this year - like 6000!  And this is just major retailers. 

http://www.zerohedge.com/news/2015-05-02/major-us-retailers-are-closing-more-6000-stores

It is about to get ugly.  By the way, I moved what money I had in it out of Pimco.  It hired Bernanke as an advisor last week and I moved my money the same day.  Mostly in cash at this point, just like the co-founder of Pimco who is no longer there, Mohamed El-Erian.  I know El-Erian is no Ben Bernanke, which is why I am following his lead.  We will see . . .

http://www.ocregister.com/articles/pimco-656718-erian-people.html

 

"But you are under-invested in real things and over-invested in paper things."

The title is a quote from Steen Jakobsen, Chief Investment Officer of Saxo Bank in Denmark.  He was interviewed on the Peak Prosperity Show and you can find the entire interview here:

http://davidstockmanscontracorner.com/get-ready-for-the-biggest-margin-call-in-history/

Bit of a long read but worth it as he has some interesting ideas on what we are doing wrong and what we can do right. He does feel that getting it right is going to take a wake-up call, as in another major financial disaster to alert politicians to the need to do something different.   He ends noting:

" I think we agree on one thing, we need to see some sort of a failure in the system for people to wake up. I think it’s very close by and I think we agree on that, yes."

 I only hope some of our politicians take the time to listen to him.  They probably won't, however, as he is Danish and what do they know.  Never mind that they are the third happiest country, well ahead of the U.S., which is just behind Mexico at number 15:

http://www.bloomberg.com/news/articles/2015-04-23/these-are-the-happiest-countries-in-the-world

and that their government debt to GDP ratio is less than half of what it is in the U.S.  Nope, these stats mean nothing and this guy, just because he has that Chief Investment Officer title thingy, certainly knows nothing.  But - hey - what if he has something there.  Instead of just throwing trillions at too big to fails and falsely building yet bigger paper bubbles, how about when things get bad we invest in things like infrastructure, education and the like.  Money still spent, but spent in a way that can truly provide a return on investment. 

Just look around.  There is plenty of worthy investment to be made.  The Boston commuter rail system could not handle this past Winter and is in desperate need of some upgrades.  Same can be said now for San Francisco:

http://globaleconomicanalysis.blogspot.com/2015/04/new-problem-old-tracks.html

And the Chicago school system is on the verge of bankruptcy:

http://globaleconomicanalysis.blogspot.com/2015/04/credit-swap-event-triggers-for-chicago.html

We have plenty of places we need to invest money and aren't and lots of places we are giving away money and shouldn't.  Time for a wake up call.

Risk Is Good

In 1970 Governor Nelson Rockefeller signed into law a statute in New York requiring commercial liability insurance policies to contain a pollution exclusion.  Why, might one ask, would a state require there to be less insurance for pollution cleanup?  Wouldn't it make more sense to prohibit pollution exclusions, like a couple of other states did, to make sure plenty of money was available to clean up pollution?

Well, the reasoning was sound.  Hold polluters accountable monetarily for the risk they were taking in polluting and they will take less risk.  After all, if their insurers were going to have to pay for it, why stop polluting when it is a lot cheaper to keep polluting.

The philosophy employed by the State of New York is the exact opposite of what the Fed and U.S. Government have been doing for quite some time.  The Fed fosters more risk taking in financial markets by flooding them with money at low rates and then when the boys of Wall Street do the predictable and take exorbitant risks with cheap money only to get caught with their overly leveraged pants down, good old Uncle Sam steps in and saves the day.  Be it TARP, the bailout of AIG, GM, Chrysler, GE or others, the wonderful powers that be simply will not let big over-leveraged risk takers fail.  The Fed claims it is fostering a stronger economy and economic growth by playing with interest rates and the government claims to help the economy by saving the Too Big To Fails (TBTF) from their just deserts.  Problem being that the low rates only really seem to help the top 1% to play financial games and make more money and the government bailouts take the risk out of them doing so.  This cycle guarantees one financial bubble after the next, with each getting worse and government deficits ballooning all the while as the taxpayers pay the bill for the bailouts.

Truth be told, there are no TBTFs out there.  Rather, these are in my view TBTS - Too Big To Save.  And for the vast majority there really is not that much at stake to let them pay the price for their stupidity.  Admittedly, for corporations that employ a host of workers, like GM, consideration has to be given to not punishing the workers who are not responsible for the mess and simply take the cost out on those responsible, but even the likes of GM disappearing could have been worth the lesson and would not have brought the economy crashing.  Plenty of other car makers would have filled the void and been better off because of the void.

And consider AIG.  Its mess was simply at the holding company overloaded with credit default swaps (CDS) it had issued.  And it had issued a lot of them.  When bond or other debt obligation payments could not be made the buyers of these CDSs started knocking at AIG's door and AIG promptly knocked at the taxpayer's door.  "Please save this fine company from an untimely demise.  If AIG folds millions of policyholders will be without insurance and the financial repercussions will be the end to life as Hank - err - -we know it.  We are simply too big to fail."  Or something like that.

http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918

But the reality is that the insurance was not issued by the holding company but by an assortment of subsidiaries, all of which are tightly regulated by their respective states and all of which were financially sound.  They all had reserves, as regulators require, and regulators also required said reserves to be conservatively invested.  Thus, while the holding company had major problems, the insurance company subs did not need saving.   AIG was not TBTF, it was TBTS. 

But noooo!  We must save it.  We must put in like $182B taxpayer dollars to prop it up.  And the only folks we really helped were the risk takers.  Some of whom thanked us by sending us roses - nope - taking out a full page "Thank Y"ou in the WSJ - nah - changing their ways - of course not.  Nope, they thanked us by suing us:

http://www.washingtonpost.com/opinions/the-federal-government-gets-sued-for-saving-aig/2014/10/13/3e0db462-50c1-11e4-8c24-487e92bc997b_story.html

Maurice "Hank" Greenberg, former CEO of AIG, sued saying the bailout violated his constitutional rights.  Since when is saving his sorry arse violating his rights?  Well, if he wants a just result, we will give him a just result.  At least NY is prosecuting him for a just result.  The grand Hankmeister is being prosecuted for some illegal financial shenanigans he is alleged to have orchestrated while he ran AIG.  Said "alleged" transactions put millions more into this billionaire's pocket.  And it is this prosecution of the Hankinator that leaves us with the best quote of the year to date.  Greenberg spokesman Steve Aiello is quoted as saying Thursday that "We think [the prosecution is] an abuse of taxpayer resources, which certainly could be used for other things in New York state.”  Isn't that just precious, the Hankenstein's counsel complaining about taxpayer resources being abused!

Well, we obviously cannot rely on the Fed or the federal government to reduce risk, but hopefully the states putting a few of them behind bars my be a tad of a deterrent. 

No Longer Greek to Me

I have written a fair amount on Greece over the years (who hasn't) and recently saw this nice piece by Felix Salmon that summarizes the situation in terms of where Greece is economically, how it got there and options forward.  If the whole situation is Greek to you, worth the read as the options forward could lead to some very interesting consequences:

http://seekingalpha.com/article/3027366-greeces-debt-crisis-how-did-we-get-here

Too simplistic, you say.  Well if you want a somewhat more complex though still enlightening explanation of what is happening in the EU, albeit one focusing on Germany, then I recommend this: 

http://www.nakedcapitalism.com/2015/04/herr-schaubles-foibles-eurozone-rebalancing-conundrum.html

It makes a nice plausible explanation of why Germany is to blame for many of Europe's woes and is now focusing its trade surplus sights outside of Europe as its European trading partners can no longer afford to buy stuff with all the austerity measures sucking away available resources.  The author suggests that it may be Germany, not Greece, that decides to leave the EU first out of self interest.  Das ist sher interesting (no freakin clue if this is even close to an accurate German translation but I think it sounds good).

Have you noticed, a lot of folks are saying the EU does not seem long for this world.  Wish I had thought of that.  Kind of makes you wonder what is going to happen to all those Euro denominated bonds floating around these days, including some 100 year ones Mexico -sí México y sí 100 años - just sold.  Seriously folks, Mexico has been selling 100 year bonds at just over 4% denominated in euros.  That is a currency exchange rate play that is going to leave a bruise.

http://globaleconomicanalysis.blogspot.com/2015/04/milestones-in-bond-insanity-negative-10.html

 Oh, this is going to be very interesting indeed.

She's A Yellen and He's Insana To Listen To Her

There is sooooo much debate lately on whether the Fed will move off ZIRP (a Mork term if I ever heard one).  Is the economy where it needs to be?  Is unemployment close enough to the target?  Are dogs now sleeping with cats?  The Fed removed that magical "patient" word recently and there is a whole market on guessing when the rate increase will come.  All eyes are on the Fed.  Or perhaps I should say all ears, as they are not exactly Yellen what they intend to do.

http://www.mineweb.com/news/gold/will-she-wont-she-yellen-interest-rates-and-gold/

Some think that the Fed should stand pat as the economy is in a tough patch at the moment and exchange rates are doing the same work as a rate hike.  While I do think the Fed will stand pat and not hike rates at all this year or next because the economy will worsen before they get to that point, I nonetheless am not saying that is what they should be doing.  Others, like Mr. Insana at CNBC,  think the Fed is just fine staying where it is with ZIRP and should do so as that is the right thing to do:

http://www.cnbc.com/id/102511918

In what language does Insana mean insane? 

While I think they will stay with ZIRP and perhaps have another QE or two next year, the Fed should not be maintaining their current stance or any stance and stop with the QEs already.  They should abandon all stances (and hope) and stop their meddling.  They of course won't do so, so I am not going to waste my time arguing why they should.  Unfortunately, they will prove why on their own in due course.

I recently linked a post by David Stockman - Reagan's Director of the OMB - who makes a very elegant case against the Fed actions for like the past few decades.  I agree with him on it but know he is wasting his breath, and rumor has it more people listen to him than me.  Note I said rumor - it has yet to be confirmed.   Nothing short of an epic bubble bursting that people finally attribute to Fed policies will get us there, and that will have to be sooo extreme it is a scary thing to ponder.  Perhaps some smart politician will be able to tie the next bubble bursting to the Fed and include in his or her platform the promise to appoint to the Fed appointees that see the role more conservatively.  Now there is little one President can do as only one Fed President gets appointed every other year and they serve 14 year terms, but if we have to wait that long to clean house it is best to get started.  And even if the Fed were magically replaced or decided to change and stop its monetary games, there is presently at least a real question on whether it would have any impact.

Let's assume Janet were to wake up tomorrow morning and lean over to her multi-millionaire husband and say, "Honey do you know where in the world I put the Depends?"  Oops, scratch that, I meant she would say "Honey, you know the world depends on us to do the right thing.  I think I will stop the Fed from meddling in things and let the economy achieve a natural balance."  If she did that, would we be alright?  No, not at all because other central banks have to stop too.  We are at ZIPR but the EU is at NIRP (which unfortunately is Negative IRP and not No IRP).  Indeed, the financial shenanigans banks and corporations use to generate financial bubbles are now increasingly taking place in Europe where credit is even cheaper.  So even if Janet and all the other Feds wake up with a dose of common sense, the bubble still cometh. 

So time to prepare yourself - if you have not already - for the storm that looms folks.  It is coming.  I do not know what Lehman Brothers pin is out there this time to pop it, but it is there.  The market knows it and has been trading sideways for four months.  Perhaps its time to move to Iceland.  Or maybe its time to move to Russia - I kid you not:

http://globaleconomicanalysis.blogspot.com/2015/04/russia-forced-to-do-right-thing-buy.html

It would appear that Russia is actually allowing free market forces to dictate for a change and it may be working.  Wouldn't that be precious - Russia mastering capitalism better than the U.S.  Put that in your трубка and smoke it Bernanke.

If You Think The Last One Was Ugly . . .

I will post more on this later, but for a nice macroeconomic overview of where we are today and how we got here, I highly recommend the following article to your reading pleasure:

http://seekingalpha.com/article/3053346-meet-the-new-recession-cycle-its-triggered-by-bursting-bubbles-not-surging-inflation