Rate Watch #778 Media Unexpectedly Wakes Up. Rates Down.

June 3, 2011
by Dick Lepre
 [email protected]
www.loanmine.com

Fundamentals

 

BLS Jobs:

- +54,000 for May. Previous was +244,000. Consensus really did not exist after ADP data. The "range of wild and inaccurate guesses" was noted at +90,000 - +200,000
- Unemployment Rate 9.1%
- Average Hourly Wage was +0.3%
- Average Workweek increased to 34.4 hours.

- Private Sector gained 83,000. Public sector lost 29,000. The manufacturing sector lost 5,000 jobs.

Half of the 54,000 net gain was from health care.

- ADP Jobs +38,000

Initial Jobless Claims 422,000
4-Week Moving Average 438,500

Worker productivity (GDP/hour worked) - Quarter/Quarter change +1.8 %
Unit labor costs - Quarter/Quarter change +0.7 %

 

Mortgage Applications
from Mortgage Bankers Association for last week
(Week-to-week changes)
- Purchase Index - 0.0 %
- Refinance Index -5.7 %
- Composite Index -4.0 %

Factory Orders Month/Month change -1.2%.

 

Analysis

 

Weak economic news has gotten difficult to ignore. This is creating another wave of refinancing opportunities.

 

I find it interesting that the BLS Report leads with "Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent" making this sound like a nonevent.

This report is ugly and serves to wake people up to the fact that the U.S. economy is in big trouble and that both fiscal and monetary interventions have produced little. The story for me is found in reading all the media accounts which describe all recent bad data as "unexpected." The fact is that the media and Wall Street have spun a rosy and unrealistic tale that the economy was in recovery. The facts are otherwise: GDP growth is a fabrication using unrealistic estimates of inflation, job growth lags that which is needed to keep up with the population growth and the consumer has lost confidence.

 

The 10-year Treasury yield fell below 3.00% this week. Last year's bottom was 2.41% on 10/8/2010 and on 12/18/2008 it bottomed at 2.08%. Those are closing numbers for those days. Are we going to test that 2.41% yield? I have no idea.

The Economy

 

I wrote last week that not enough attention was being paid to just how dismal the economy was performing, This week I am happy to report that is not longer true. Now most everyone knows just how dismal the economy is performing. This past Wednesday's dismal ADP report on private sector jobs provided the third side to a triangle which consisted of: weak GDP growth, a double-dip in home prices, and a weak jobs market.

 

The instant media reaction seemed to be "we need QEIII." To me, that is stupid. The problem is that folks simply do not understand the complexity of what the Fed was trying to do. QEII did little to stimulate the economy. What is did was increase monetary base and cause the dollar to fall in value. This inflated commodities (bad) and equities (good.) The Fed felt that giving a boost to equities would create a feel good or wealth effect and that would get people spending again. Increasing momentary base is easy. Increasing monetary velocity (how often a dollar gets spent) is tougher because that necessitates consumers willing to spend and bankers willing to lend. The lack of confidence in the economy prevents both of those.

 

I think that the problem were are having is summarized by Rick Davis of Consumer Metrics. Rick's data shows that we recovered from the 2008 recession only to start another contraction at the start of 2010. Rick offers this analysis:

 

"The bottom line on this contraction is that, indeed, "this time is different." Our data indicates that the classically defined 2008 "Great Recession" was felt disproportionately in the finance and "large cap" business sectors, with consumers spooked by the headlines from "Wall Street" but largely un-impacted themselves. However, since then (even as the contraction was disappearing for "Wall Street") a shadowy extension of the "Great Recession" has evolved and become personal and deeply entrenched on "Main Street," where unemployment has proven to be more than a temporary inconvenience and real disposable incomes have continued to shrink."

 

Consumers are finding it more difficult to purchase homes because of tightened underwriting standards and, with values falling, are in no hurry to try. Higher commodity prices (food and gasoline) which were a byproduct of QEII have taken away some discretionary spending.

 

The underlying problem is the this recession hammered the banking system. Massive losses occurred and those losses involved highly leveraged real estate debt. The effect of the bursting of the housing bubble was many time worse that the dot-com bubble bursting because this debt was leveraged.

 

The fantasy portrayed in the media is that banks did just fine at the expense of the public. The fact is that massive banks such as WAMU, Citibank and Countrywide suffered gigantic losses to their shareholders. Politicians and the media ignore the fact that this was started in motion by HUD with the National Homeownership Strategy. While choosing to believe that banks did this and we bailed them out may suit one's political prejudices it impairs the ability to understand what happened and what a solution might be.

 

Because there is a Presidential election next year the worst part is that there is near zero possibility of getting the imbeciles in D.C. to address the problem before February 2013. This is what was on the front page on on-line NYT Thursday morning: "Employment Data May Be the Key to the President’s Job" followed by "Drop in Claims for Jobless Benefits Is Less Than Expected." NYT was trying to sell the notion that 422,000 initial jobless claims was good news. It is not good news. The only good news was that the bad news was not worse.

 

Fortunately both investors and Main Street are not buying the notion that we are in economic recovery. The average guy out there simply does not believe what politicians and the media are selling.

I should not be so dismissive of government. This week the USDA replaced the "food pyramid" with a "healthy plate" icon. I am still trying to figure out why the "dairy" part is in blue and "protein" is purple.

 

The Problem

 

The present problem may be one that we have no seen before. Deficits are enormous but the deficit spending of 2009 boosted GDP by increasing the government spending part of GDP. Keynesian deficit spending is of value if and only if it increases consumer spending and investments. Absent those, the only lasting effect is an increase in the national debt. The Keynesian spending in the 2009 stimulus was ill spent. Too much of it went to support state and local governments. It may be the case that through regulations we have made infrastructure creation difficult because of the length of time necessitated to study the impact of creating that infrastructure.

 

The present situation is very ugly. This is going to take a long time to recovery from.

---

Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
California Department of Real Estate - real estate broker license #01201643
[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

 

Comments

[Neal Patterson]

Dick,

I enjoy your Rate Watch emails very much.

I really wonder if it is ever correct to say, "Keynesian deficit spending is of value...". As a nation we do pretty well at spending. There are still plenty of maxed-out people around.

When government borrows and spends, at the very least, this is disrespectful of my time preference for spending. The government is spending my money NOW and assuring me of a future tax increase - which makes me feel less secure and less inclined to spend. Also, it seems to me that, to some extent, every dollar spent now is one that cannot be spent in the future. Isn't all this current spending a kind of feasting on the "seed corn" of future economic activity? Thanks.

[Dick Lepre]

Neal,

Great question. Let me make two points first. 1) Every economics student had been taught that Keynesian spending is good and 2) the attitude toward Keynes' notions about spending are largely split by political preference.

Keynes basic notion was, I think, sound: the economy goes through cycles and when the economic activity of consumers and investors abates the government should spend in and increase spending to prop up the economy.

Keynesian spending is of value if and only if is cascades. That is, if and only if the dollars spend by the government expenience a "money multiplier" are are spent again and again.

The problem is that the Great Recession was not a garden variety economic down cycle. It resulted from a real estate bubble which affected the banking system. Real estate debt is highly leveraged unlike, say, the dot-com bubble. Collapse of the value of that which is highly leveraged has a mopre pervasive effect. This happened to Japan more than 20 years ago and they still have not recovered.

Keynesian deficit spending may work best for infrastructure and we may have painted ourselved into a corner with too muck environmental regulation making WPA-like infrastructure spending impossible.

The 2009 stimulus was aimed more at supporting state and local governments and had too little to seed real recovery.

Borrom line is that Keynesian spending makes sense if it pays for itself with expanded GDP and tax revenue without tax increases. It is becoming obvious that this did not happen with the 2009 stimulus.

Worse yet, we have enormous structural deficits from Social Security, Medicare and Medicaid which have never been properly funded. In short we have two problems: structural deficits and cyclic deficits.