Rate Watch #780 How to Fix the Economy
June 17, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
Fundamentals
Leading Economic Indicators was +0.8%. I do not believe that LEI has been an accurate gauge of GDP as of late. It assumes that money supply increase and low interest rates will give GDP a boost. This has not been happening. Money supply and low rates are the dog’s head but the tail (consumer spending) has not been following. The reason is no mystery. The Fed is paying interest on excess reserves and there is $1.609845 trillion in excess reserves parked at the Fed. Excess reserves have increased by $573 billion since the start of this year. See Fed Report H.3.
Consumer Sentiment dropped to 71.8 for the first half of June. This is supposed
to measure predisposition to spend.
Housing:
May Starts 560,000 (annualized)
May Permits 612,000 (annualized)
Both are above previous. We need about 1,500,000 Housing Starts a year to keep
pace with a) population growth and b) units scrapped to disaster or obsolescence.
Mortgage Applications:
Purchase Index - Week/Week Change 4.5 %
Refinance Index - Week/Week Change 16.5 %
Composite Index - Week/Week Change 13.0 %
The refi index is driven by low rates but the purchase index is a ray of hope.
Jobs:
Initial Jobless Claims last week were 414,000. The 4-Week Moving Average was
424,750.
The Consumer Metrics Daily Growth Index (a leading indicator measuring online Retail Sales) shows on-line sales contracting on a year-over-year basis. This index has been negative for 516 consecutive days. The implication is that the increased government spending of the stimulus has not translated into lasting gains in consumer spending. This index is the first graph on this page.
Inflation:
CPI - Month/Month (overall) +0.2 %
CPI - Year/Year (overall) +3.4 %
CPI - Month/Month core (less food & energy) 0.3 %
CPI - Year/Year core (less food & energy) 1.5 %
The Month/Month core is a tenth above "acceptable". The details may be read here.
PPI core and overall Month/Month were +0.2% for May
PPI core Year/Year was +2.1%
PPI overall Year/Year was +7.0% - a reminder of how large the swings in food
and energy have been.
Industrial Production - Month/Month change +0.1 %
Capacity Utilization Rate - 76.7 %
Retail Sales:
Retail Sales (overall) Month/Month was -0.2%
Retail Sales (less autos) Month/Month was +0.3%
The Technicals
The daily has resisted its down cycle and was upcrossed to bullish at the end of yesterday's trading. The weekly is bullish. The monthly is neutral. The market still has a general bullish tone.
Jim Grauer (StoMaster) has a description as to how these techs can be used by mortgage professionals and borrowers. The detailed narrative may be found daily at StoMaster. Jim understands the techs as well as anyone whom you may see commenting in the media. He has been doing this for about 25 years and is capable of reading the technical patterns in the context of what they have indicated in the past. Most other technical analysis is much more simplistic.
Analysis
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The EU has decided to put off addressing the Greek debt crisis until September.
This will prove to be the correct choice only if an asteroid wipes the planet
out this summer. Once Greece defaults there will be two effects on the U.S.
economy: 1) Treasury prices will rise and rates fall consequent to another flight-to-quality
2) U.S. banks will suffer serious losses on the credit default swaps they hold
guaranteeing Greek debt.
There Must Be Some Way Out of Here
The U.S. Economy is in a bad state. What can be done? I will offer an agenda:
1) reconsider our participation in the Basel accords and recognize that purely commercial banks have a different set of risks that the now hybridized investment/commercial banks. These regulations penalize purely commercial banks by demanding higher capitalization while insanely suggesting that derivative trading is no more risky. The people framing Basel III are considering something like this. As I wrote a few weeks ago the "one size fits all" notions of Basel are counterintuitive. I see no reason why every country needs the same rules. The biggest problem I have with Basel is that it assumes that risk is static.
2) enact Simpson-Bowles. Absent a comprehensive solution for fiscal sustainability, nothing else matters.
3) encourage privatization of infrastructure spending
4) eliminate some government regulations which discourages infrastructure building and job creation. The notion that Keynesian deficit spending can jump start the economy may have been rendered useless by excessive regulation regarding environmental protection and zoning
5) give a new agency control over the deficit
6) recognize that politics is the problem not the solution
7) eliminate government agencies which are no longer needed or have failed
8) discourage the government from creating asset bubbles (see next paragraph.)
Each of those is a short phrase but a massive change in the way of doing things. What we must recognize is that the problem is not an economic one but a political one. Simpson-Bowles is the best example. Presented with a comprehensive solution to our fiscal ills the President and most of Congress have ignored it because it is not compatible with reelection. Another example is Dodd-Frank. Congress gave no recognition to the fact that the subprime mortgage mess was set into motion by the government with the 1994 National Homeownership Strategy. Politicians have placed the blame on banks (let me be clear that banks certainly played a gigantic role in this) and passed Dodd-Frank which creates more banking regulation. It will be years before the effects of Dodd-Frank on the banking system and the economy in general are felt.
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
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax
I wonder who is the Joker and who is the Thief? What would Dylan do?
Posted by: Matt Penning | June 17, 2011 at 09:32 AM