Flight to Safety Since January 1

Above are four charts, all of which are from US treasury market ETFs.  The IEIs are for the 3-7 years, IEFs for 7-10 year, TLHs for 10-20 year and TLTs for 20+ years.  All have rallied since the beginning of the year.

What this shows is since January 1, we've seen a fundamental shift in trader's perception of the market as they prefer the relative safety of treasuries over stocks.

Q.: What's the politically correct word for "mentally retarded?" A.: Apparently, "Peter Schiff"

 - by New Deal democrat

According to Business Insider, last night Euro Pacific Capital president Peter Schiff actually took the position that "people don't go hungry in a capitalist economy.....  It's socialism that creates scarcity, that creates famine," Schiff said. "In a free market, there's plenty of food for everybody, especially the poor."

Asked who should earn a wage of $2 an hour, Schiff replied, "What the politically correct word for 'metnally retarded'?"

Never mind that in the Great Depression, with 25% unemployment in 1932, people died of starvation in nearly every single town, and at one point it was estimated that 25% of all schoolchildren were malnourished.

All of those perfectly competitive free market equations that people like Schiff love don't guarantee that people won't starve, they just (supposedly) assure that the most economically efficient number will starve.

So the answer to Schiff's question appears to be, "Peter Schiff."

He walked into that one.

A reminder about housing sales and prices

 - by New Deal democrat

House prices show a lot of seasonality, so the only good way to keep track of them is YoY, and YoY price increases are still running very strong.

So how can I be forecasting a decline in house sales if prices have continued to rise so strongly?  Because sales will peak and turn down before prices.

In case you needed a refresher, here's a graph of sales of single family homes (red, right scale) compared with median prices for new single family homes (blue, left scale) for the last 10 years:



Recall that sales peaked a full two years before nominal prices turned down.

While I don't believe we are in a new bubble (adjusted for income, prices haven't risen nearly so much off their bottom), there has been quite an outcry that traditional first time homebuyers are priced out of some markets.

In any event, I believe the transmission of higher interest rates through the housing market will unfold the same way.  Sales will turn down before prices do.

But isn't inventory still tight?  Yes, but remember that the months-of-supply metric can resolve either through more inventory coming on the market, or monthly sales declining, or both, which is what happened when the housing bubble burst.  If in the next few months sales decline to 900,000 annualized, that will go a long way to a "normal" number of months of supply.

Indian ETF Hitting Resistance

The top chart is the daily Indian ETF chart, while the bottom is the weekly chart.  Both charts show the market hitting resistance in the mid 57 area.  Anytime a market hits resistance this regularly, we need to ask why, which is almost always answered by the fundamentals.

The Indian economy is experiencing fairly serious structural problems.  On one hand, inflation is high bringing with it all the associated problems.  At the same time, growth is slowing, leaving the central bank in a rather unenviable position.

The housing slowdown has already begun

 - by New deal democrat

With yesterday morning's surprise -50,000 month/month decline in new home sales, the 2013 housing data is in the books, and it confirms that in 2013 there was a marked slowdown in the housing recovery.

Below is the graph of building permits (blue), starts (green), new home sales (beige) and existing home sales (orange) for the last three years, normed to 100 at the start of each year:



After being up over 10% in each of 2011 and 2012 (over 20% as to permits), permits, starts, and new home sales finished 2013 up 10% or less for the year, and existing home sales are actually negative for the year.

Now here is the same data presented as YoY percentage change, and compared with the YoY change in interest rates (red, inverted, right scale):



The simple fact is that the housing market follows interest rates usually with a six to nine month lag.

Finally, here are housing permits (blue) and starts (green) in 100,000's YoY vs. interest rates, inverted:



The past history is that a 1% increase in interest rates typically is consistent with a 100,000 decline in permits and starts.  The data that we have seen in December confirms that in 2013 we already have seen a slowdown, and is in accord with my forecast that at some point this year, we will see a YoY change of -100,000 in permits and/or starts.  Could it be different this time?  Of course, but history is on my side.

Australian ETF Breaks Support on Weekly Chart

Above is a weekly chart for the Australian ETF.  It had been consolidating in a triangle formation which lasted about 9 months.  But price action over the last several days has sent prices through the support of the lower trend line.

There are several reasons for this.  First, Australia's fortunes are directly tied to Chinas, as Australia exports a large amount of goods to China.  Second, Australia recently had a very negative employment print, showing a contraction of jobs rather than an expansion.  As a result, traders have sent the ETF lower.

What the Heck is Happening In the Markets?

This is up over at XE.com

The International Sell-Off In Perspective

As we start this week, we should look at the price action from the end of last week, as this will have a strong impact for the next few tradings days.

The all Asia except Japan ETF had been trading between 57/57.5 and the lower 61s.  Last week we saw a sharp sell-off as prices broke through the 57.5 level by printing two strong down-day bars.  Also note that prices moved through the 200 day EMA.  The only thing lacking from this sell-off was a huge volume spike. But this could mean the big volume spike is yet to come.

The emerging market ETF was already below the 200 day EMA, making last week's sell-off more pronounced.  Unlike the AAXJ chart above, this one does have a huge volume spike.  Also note the shorter EMAs are now below the 200 day EMA.

International Economic Week in Review: Emerging Market Sell-off And US Profit Taking Edition

This is up over at XE.com

Weekly Indicators for January 20 - 24 at XE.com

 - by New Deal democrat

Weekly Indicators for this week are up at XE.com.

One week ago rail traffic and consumer spending took a big hit, which I blamed on the extreme cold from the "polar vortex."  This week I look to see if they rebounded.  The long leading indictors also had something of a rare week of late.

The exception to the rule about interest rates and housing: "Buy now or be forever priced out"

 - by New Deal democrat

As I have written extensively in the last several months, a rise in interest rates has almost always - 17 of 21 cases since World War 2, to be precise - been consistent with an outright decline several quarters later in housing.  Typically a 1% increase in interest rates has been consistent with a 100,000 decline in the volume of housing permits and starts.

But what about the 4 exceptions?  Are they just random outliers, or is there a common thread linking them?

It turns out that, in at least 3 of the 4 cases, there is a common thread: in the immortal words of housing bubbleheads circa 2005, "Buy now or be forever priced out."

The housing bubble of 2004-06 remains the biggest exception in the nearly 70 year history of housing and interest rates that I've examined.  Here's the graph of interest rates YoY change (inverted, red) and housing permits YoY change (blue) during that period and the immediate aftermath:



As you can see, despite the fact that interest rates not only had not fallen, but in fact had risen somewhat and remained elevated for several years, housing permits continued to increase stoutly.  As we all recall that housing prices (Case Shiller Index, green, index values at right) were rising at the brisk clip of 10% or more a year for about half a decade at that point.  It was a common trope that "real estate only goes up!"  If so, you had better buy today, because tomorrow the house you wanted would only get even more expensive.  And for a long while it did.  Until it didn't, and housing crashed in equally spectacular fashion, as you can see from the latter part of the graph above.

A similar, although not identical, explanation can be found to the exceptional performance of housing in 1968, and to some extent, also in 1979.

Inflation and interest rates had remained tame throughout the 1950s, and slightly increased in the early 1960's.

But in 1965, Lyndon Johnson began his "guns and butter" fiscal policy.  Previously, it had been understood that you could only either finance wars (guns) or domestic programs (butter).  Johnson believed the US was so strong that he could do both.  The result wasn't just inflation, but increasing levels of inflation every year beginning in 1965.  By 1968, inflation had increased to 4% and showed every sign of accelerating further (and indeed it did).  In its report for 1968, the Federal Reserve Bank of St. Louis pointed out this increasing rate of inflation with alarm.  It appeared to be the number one economic issue facing the country.

This meant an aspiring homeowner had to deal with not only an increased mortgage rate (which would ordinarily drive housing construction down), but the belief that, if s/he didn't buy a house now, then in 3 or 6 or 12 months those mortgage rates would be even higher.  Needless to say, the prudent buyer bought now rather than later, despite the higher interest rates.

And that's what the graph shows (green line is YoY inflation rate):



Notice that these sales only borrowed from future demand, as at the end of 1969 the US entered its first recession in almost 10 years.

The same dynamic was in play in 1978, with the same result.  Here's the graph:



Additionally, in 1978, there were several months that mortgage interest rates (orange) declined significantly, and were in fact negative YoY.  This coincided with spikes in housing.  Contrarily, there were several months in 1978 that were negative YoY, although not negative enough to result in a negative YoY quarter. Nevertheless, the reckoning was only delayed until 1979.

That leaves only 1962.  I have been unable to find any reliable source of what may have happened with mortgage interest rates that year.  We can say that the increase in interest rates was relatively short-lived, and that while housing never turned negative, it did turn lower for about a year, falling under +50,000  for 3 of those months.  You can also see that inflation (green) began to tick up at this point:




In short, the exception to the rule that rising interest rates are associated with a decline in housing about 6 to 12 months later is when the costs of buying a house not only have risen, but it is expected that they will rise even further in the immediate future.  In those circumstances, it makes sense not to delay the purchase of a new house even though interest rates have already moved against you.

So, is there a component of "buy now or be forever priced out" in the present environment?   Actually, I believe there has been, evident in the spikes of demand in July and August in existing home sales, and in October and November in housing starts and permits, as shown in this graph of housing permits (blue), new home sales (red), and existing home sales (green) since January 2013:



A number of buyers may have tried to lock in rates before they rose any further, as evidenced by the surge in existing home sales in July and August, and permits and new home sales in October and November.  That dynamic appears to be fading, and there does not appear to be any mentality that mortgage rates will continue to rise significantly from here.  If anything, interest rates seem likely to meander around their current level, and buyers will take advantage of the dips.  But that is not the same as "buy now or be forever priced out."

The bottom line is that the exception to the rule that rising interest rates cause a decline in the housing market does not appear to be in play at present. So, having considered the exceptions to the rule, I continue to believe that housing will actually experience a decline (that has already begun) in approximately the first 6 months of 2014.

Existing home sales down YoY and down 10% from high for second month in a row

 - by New Deal democrat

Let me be the first to say that, of the measures of the housing market, existing home sales are the least important, because they don't have the impact that new home construction has on the economy.
But, that being said, they typically move in the same direction as new home construction.

So, for the Doubting Thomases who think my forecast of a weakening housing market due to the rise in interest rates last year is off the mark, the title of this post states the simple facts.

For the second month in a row, existing home sales are less than they were a year ago.

For the second month in a row, existing home sales are down over -500,000 sales annualized from their July and August 2013 peaks.  November was off slightly more than 10%, and this month was -9.6% off that peak.

Here's the graph of existing home sales since their bottom at the end of 2010, with 2013 highlighted in red (set to 100 for January 2013):



And here is the same data presented YoY:



In addition to existing sales, both housing permits and starts have cooled down from growing at a 20% rate in 2012 to +4.6% and +1.6% respectively at the end of 2013.

So far, only new home sales have not meaningfully decelerated.  Those will be reported next week.

Additionally, Bill McBride reiterated this week why he remains bullish on housing and accelerating economic growth in 2014.  He and I do disagree on what some of the facts mean, but I want to wait for next Thursday's GDP report before I explain why.

Meeting Minutes Indicates BOE Is In No Hurry to Raise Rates

This is up over at XE.com

Gas prices stay near seasonal low for nearly 3 months

 - by New Deal democrat

Gas prices have stayed at their seasonal nadir at an unusually long time.  Over at XE.com, I discuss this in the context of whether the Oil choke collar is continuing to loosen.

Australian Employment Situation Getting Worse

This is over at XE.com

Chinese Market Continues Moving Lower

The Chinese market has been in a bit of a funk over the last nine months.  Prices dropped to the 1950 level in late June.  They rose to the 2260 level twice; once in September and once in early December.  But since early December, prices have been dropping.

The reason for the lack of any meaningful rally in China is the slowing growth picture.  On Sunday, we learned that YOY GDP growth slowed again to 7.7%.  While this is still high by developed world standard, it actually represents a decline from the Chinese story.  As a result, traders are sending shares lower.

Why the decelerating trend in housing and car sales is a cause for concern

 - by New Deal democrat

As I have already written, there are increasing signs that the increase in interest rates and the death of mortgage refinancing are beginning to eat into consumer purchases.  Specifically, growth is flagging as to both the two biggest assets owned by families:  houses and cars. 

I have been sounding the alarm about decelerating housing for awhile, but now this may also have spread to vehicles as well.  I say “may” because typically vehicle sales plateau at some point in expansions – but in the last expansion vehicle sales plateaued at a level 1,000,000 vehicles per year above the maximum number sold on an annual basis in 2013.

Below is a graph (averaged quarterly to cut down on noise) of  the YoY% growth in housing permits (blue) and auto sales (green), compared with GDP (red) for the last 30 years:

Now here is the same data for the last two years, but monthly better to show up the recent trend:

Note that, measured quarterly, both houses and cars are selling at a level of YoY growth that is very strong compared with the last 30 years, even though there has been a significant decline in that rate of growth.  At the same time, when we look at the trend on a monthly basis, both housing and cars look set to turn negative by the end of the first quarter.

That housing and cars are showing relative weakness may not sound like a big deal.  Until you remember a paper presented by UCSD economist Edward Leamer at Jackson Hole in 2007, Housing and the Business Cycle, in which he said:

We have experienced 8 recessions preceded by substantial problems in housing and consumer durables....
....
Residential investment consistently and substantially contribute[d] to weakness [in GDP growth] before [these 8] recessions....
....
After residential investment as a contributor to prior weakness come consumer durables, consumer services, and then consumer nondurables.  Those are all consumer spending items -- it's weakness in consumer spending that is a symptom of an oncoming recession....  The timing is: homes, durables, nondurables, and services.  Housing is the biggest problem in the year before a recession... durables is the biggest problem during the recession [although consumer durables declined even more than housing before 2 of the 10 post World War II recessions]

The same interest rate or other variables [mainly employment] drive both the housing cycle and the durables cycle....  It turns out that much of the amplitude in consumer durables comes from vehicles not furniture

If you look at the first graph above, you'll see at least 3 occasions that were "false alarms."  Both houses and car sales turned negative YoY in 1987, 1994, and 1996 without any recession ensuing.  But they did turn negative significantly before all three of the last recessions, including the 2007-09 recession that was just about to begin when Leamer gave his presentation at Jackson Hole. 

Leamer said that on average housing's relative contribution to GDP turned down about 5 quarters before the onset of a recession, followed several quarters later by cars. *If* the present trend continues, there is an excellent chance that housing and cars will be negative by mid-2014.

A note for Sunday: a maturing expansion

  - by New Deal democrat

I thought I'd pen this note to clarify my 2014 forecast a little.

I wrote that I think this will be a year of decelerating growth.  I am still positive about the first three quarters of this year, and almost all of the indicators I use indicate that the present quarter, like the second half of last year, should be very positive.

And I do not foresee any recession, at least through the first three quarters of this year.  I'm withholding saying anything definitive about the 4th quarter until I see how corporate earnings play out in the current reporting season.

So I'm actually not pessimistic about this year at all.

Where I differ from most people who have written forecasts is that, while I expect the news to remain positive, I also see it being not quite so positive as the year progresses.

The most obvious difference I have with most is that I expect housing permits and starts to actually turn negative during the first half, in fact if the trend continues they'll be negative within 3 months.

If you want a simple phrase that captures my feeling well, it would be that we are in a maturing expansion.

All of the things that I would expect to turn up early have turned up.  With the exception of interest rates, none of the things I would expect to be negative a year or more out from a recession are negative.

Still, I feel a little like I did at the beginning of 2009.  We were in the epicenter of the recession, when I noticed that retail sales had stopped dropping like a rock.  I also saw that the pace of housing permits had been plummeting at a rate of -500,000 a year or more for several years, and was under the absolute level of 600,000 annualized.  Housing almost literally had to bottom in early or mid 2009, unless it was going all the way to zero!  So I started to watch for signs of a bottom or a turnaround.  And since I had been very bearish, even comparing the situation in 2007 to 1929, Doomers turned on me (and Bonddad) with a vengeance.

For a long time I've been trying to find sort of "anti-coincident" economic indicators.  These would be indicators that turn up or down after the lagging indicators but before the leading indicators of the next move.  There seem to be several, and they all appear to have peaked.

In general, what I am seeing are trends that I would expect to see in an expansion that is still moving along, but is getting a little long in the tooth.  For example, recently an increase in capital expenditures has been cited by bulls.  But that may well be a signal of a late point in the cycle.

This week or next week, I plan on writing about these trends, and more about my bearish housing call.  There is more supporting data, and I've pretty well figured out why 4 out of 21 times since WW2 that interest rates rose, housing didn't fall, so I'll explain that as well.

So I'm not actually pessimistic about 2014.  I am simply increasingly confident that we are in "a maturing expansion."  What is depressing is that wages are still stagnant, real disposable personal income has been improving at a pathetic rate, and employment is nowhere near recovering to its pre-recession level on a working-age population basis.

International Economic Week In Review: The Non-Threat of Inflation Continues

Last week, the biggest news was the continued lack of global inflationary pressures.  The US’ core PPI was 1.4% Y/Y while the core CPI printed at 1.7% for the same period.  Germany’s WPI was .4% M/M, Italy’s was .2% M/M and .7% Y/Y while Spain’s was .3% Y/Y.  UK inflation dropped a bit, with core CPI coming in at 1.7% Y/Y and core PPI coming in at 1% Y/Y.  The sum total of all this news is central banks in the US, EU and UK have nothing to worry about from inflationary pressures.  Should each bank want to continue their policy of low interest rates, they certainly can.

More over at XE.com

Weekly Indicators for January 13 - 17 at XE.com

 - by New Deal democrat

Weekly Indicators are up over at XE.com.

Remember the polar vortex from last week?  It seems to have kept consumers indoors and freight from moving.

December housing permits and starts: least improvement in almost 3 years

 - by New Deal democrat


I discuss this morning's report on housing permits and starts over at XE.com.

Both of these series continue their deceleration and are on the verge of turning negative YoY.

Housing: the last time low interest rates got 'less low,' it wasn't 'different this time'

 - by New Deal democrat

Two  signifiant arguments contra my contention that housing demand will actually decrease at least for awhile YoY this year are that (1) there is a lot of pent-up demand, and (2) interest rates at 3% are still low so there shouldn't be that much of a reaction.

Fair points.  But this isn't the first time that there has been pent-up demand for housing in an era of low interest rates.  While the statistical series aren't identical, they clearly show that there was a huge housing bust during the Great Depresssion, that lasted through World War 2.  Then all the GI's came home in 1945 and got busy making babies. Boom!

And interest rates were low throughout the 1940's and 1950's, rising to no more than 3% until about 1957.  While the 10 year or 30 year treasury bond series doesn't go back that far, the archival series "long term US government securities" does:



Note the series LTGOVTBD overlaps with the 10 year treasury series during the 1960's.  Here's the comparison of YoY% changes in each, to show how closely they correspond:



Similarly, the series "nonfarm housing starts" began in 1946 and ended in 1969.  Here is the YoY% change in each during their period of overlap in the 1960's:



Now that we've established that the late 1940's and 1950's, like the present, were an era of pent-up demand with low interest rates, and we have two data series that will show us the correlation between changes in interest rates and housing starts, let's plot their YoY% change on a quarterly basis from 1946 through 1962 (I've already covered 1963 to the present):



The argument against my bearishness is that minor changes in interest rates won't result in major changes in housing demand.  But in the post-WW2 suburban Baby Boom era, far from being muted, the changes were magnified.  A change of as little as 0.2% in interest rates was associated with changes of 200,000 or more in housing starts. On 5 of the  6 occasions from 1946 through 1962 that interest rates increased YoY, housing starts fell YoY, in each case by at least 100,000 units annualized (even in 1962, several months were negative YoY, although no quarter was).

Previously I've shown that on 12 of 15 occasions since 1962 when interest rates have gone up by 1% YoY, housing permits have fallen by -100,000 or more.  This data makes the total 17 of 21 times over almost 70 years, and even with interest rates rising by less than 1%.

So, could it be different this time?  Certainly.

But what we can say is that the last time, like this time, that it was "different this time" because of pent-up demand and low interest rates,  it turned out that it actually wasn't "different this time."

Population adjusted initial jobless claims and the unemployment rate: an update

 - by New Deal democrat

Occasionally over the last few years I have remarked upon the usually tight relationship between population-adjusted initial jobless claims and the unemployment rate. Overall the unemployment rate tends to follow the trend in the population-adjusted initial jobless claims with about a 6 to 12 month lag:



Thus, while we can quarrel about the reasons, the fact that the unemployment rate has continued to drop sharply over the last year, following the trend in initial claims, was not unexpected.

With initial claims near historical lows as a share of population, the issue becomes whetherr the unemployment rate can fall much below 6%, or whether the gap that opened up in 2009 will ultimately be closed.

I anticipate that the unemployment rate will continue to fall, perhaps at a somewhat slower rate, to about 6%, but have a very difficult time declining meaningfully below that level.

There is no "falling rate of personal consumption growth"

 - by New Deal democrat

Yesterday the blog "Capital Spectator" featured a post entitled Is the falling rate of personal consumption growth a new risk factor? featuring this graph of the YoY% change in real personal income:




The blog is a good and respectable source of information, but in this case, I think they made a mistake.  The entire "decline" for 2013 is contained in last month's data, and there's a very good reason why that happened.

Here's a bar graph of the monthly percentage change for the very same data:



Notice the huge spike upward in November and December 2012, and similar spike downward in January 2013.  That's because of moving taxable income forward from 2012 to 2013 due to the higher tax rates that were anticipated due to the "fiscal cliff" expiration of the Bush tax cuts  at the end of 2012.

So the November 2013 - January 2014 YoY comparisons now will be between "regular" monthly changes now vs. the very volatile changes of one year ago.

When we back out the months of tax law timing, here is the YoY% comparisons we get:



Flat.  There is no "falling rate of personal consumption growth."  Not that Zero Hedge won't have an article trumpeting the alleged downturn when the December comparisons come out at the end of this month.  Or that they won't be completely silent about YoY January comparisons too.

The relationship between interest rates and stock prices has changed

  - by New Deal democrat 

The correlation between stock prices and interest rates has completely changed for the last 15 years, compared with the previous 40 years.  I have a new post up at XE.com explaining how and why.

USD/JPY Tops Out For Now

This is up over at XE.com

The state of the consumer: "I'm not dead yet!"

  - by  New Deal democrat

Like the character in the "Bring out your dead!" Monty Python skit, the American consumer keeps protesting that s/he isn't dead yet.

So why, given wages that are several percent below their 2010 peak, do consumers keep spending?

Let's go back to the paradigm for the American consumer that I first set forth 6 years ago.  In order to increase spending, the American consumer must either:

• have a wage increase
• be able to refinance debt at lower rates, thus freeing up cash
• be able to cash in an appreciating asset

Let's look at each in turn.  First of all, while inflation adjusted wages have been overall flat for the last 5 years, there has been a tick up of several percent since the late 2012 bottom:



On the other hand, as shown in this graph from Mortgage News Daily, the increase in interest rates has well and truly killed refinancing:



Finally, here is a graph of Americans' total net household worth, via Doug Short:



Why has household net worth almost completely rebounded?  Mainly because of increasing house values, as shown in this graph of the Case Shiller index:



Secondly, more affluent households who rode out the downturn in the markets during the Great Recession are seeing their 401k balances completely recover along with stock prices, as shown in this graph of the S&P 500:



We know that there is a wealth effect, and for now the wealth effect is picking up where debt refinancing left off.

As an aside, here is the graph of those "Not in the Labor Force, Want a Job Now" I ran on Friday:



Notice the spike downward in the last 6 months.  I do not think it is coincidental that it mirrors the graph of household worth above.  The Altnata Fed has reported that in the last couple of years the percentage of those leaving the workforce due to retirements has increased, and I suspect that the recent spike in net worth has caused a stampede of Boomers for the exits.

International Week in Review: US Payroll Shocker Edition

This is over at XE.com

A thought for Sunday: when it comes to inequality of opportunity, yes there IS something wrong with the Pareto principle

 - by New Deal democrat

 Prof. Brad DeLong reposts an essay on inequality of opportunity from Angus Deaton:

Even if we believe that equality of opportunity is what we want, and don't care about inequality of outcomes, the two tend to go together, which suggests that inequality itself is a barrier to equal opportunity.

What about envy of the rich? Economists have a strong attachment to something called the Pareto principle ...: If some people are made better off and no one is made worse off, the world is a better place. Envy should not be counted....

.... 

To worry about these consequences of extreme inequality has nothing to do with being envious of the rich and everything to do with the fear that rapidly growing top incomes are a threat to the wellbeing of everyone else.

There is nothing wrong with the Pareto principle, and we should not be concerned over other' good fortune if it brings no harm to us....

I beg to differ.  The Pareto principle is an extremely conservative restriction that entrenches existing inequalities of power and wealth in place, virtually in perpetuity.

Let me explain.  Below is a graph taken from a recent Harvard and Duke study, in which they asked Americans what they thought the existing distribution of wealth is, and what they think it should be, comparing those with the actual distribution of wealth:



Americans think the top 20% owns about 55% of the wealth. They think a fair distribution would be for the top 20% to own 33% of the wealth.  In fact, the top 20% owns about 82% of all the wealth in the US, and the bottom 60% own only 4% of the wealth (and the breakdown only gets more lopsided when we consider the top 5%, top 0.5%, and top 0.05%).

So, let us say that we democratically as a society decide that equality of opportunity should result in our fair wealth distribution as described above, and so we enact frictionless and fair policies, consistent with the Pareto principle, to move to the wealth distribution that Americans say would be fair now. How long would it take to get there? When would we arrive?

The answer is:  never.

Under the Pareto principle, we cannot redistribute existing wealth, since doing so would make those from whom it is redistributed worse off.

We can try to get around this two ways:  the first is, we only pass policies to ensure that future economic growth winds up being allocated, after taxes, in the distribution we have chosen as fair, or some facsimile thereof.

So we arrange our tax and other public policies to assure that not a cent of existing wealth is redistributed, but future growth winds up adding 33% of the total to the top 20%.  Yes, I know we are talking unicorns and rainbows, but here's the point:  even if we could do that, even if we did it for 10, or 20, or 50, or 100 years, or forever, we would never arrive at the wealth distribution we believe is fair.  The top 20% would always have 33% of the wealth accumulated since now, and more than 33% of the pre-existing wealth.  Thus, out into infinity, they would always have more than 33% of the total wealth. (Yes, I know what I've just written is a vast oversimplification blah blah blah. Note to economists: just consider it a "model," and then it's all good.)

The only way to get to 33% via future policies is to ensure that, for some period of time, the top 20% accumulate less than 33% of the new wealth, which we already have agreed is unfair, since we have agreed that they should have 33% of the wealth.

Needless to say, if our policies are far more incremental, which is of course far more likely, then we never even get close.

But wait, you say, people die. We simply change our estate tax laws to approximate what they were back in the 1930s, and prevent the transfer of $Billions to succeeding generations of heirs.  There are several problems with this.  The first is that, depending on how the tax laws are written, it will take decades to lifetimes to come to fruition.  The second is the objection that existing plutocrats derive pleasure from the fact that they can dispose of their wealth, upon their death, as they see fit,  and if that means ensuring that their heirs out unto the generations remain among the plutocrats, that is their right.  If we interfere with that, we are making them very sad.  The Pareto principle is violated.

The bottom line is, any choice by society to enact policies to move away from an existing distribution of wealth - even, let me emphasize, unearned, inherited wealth - violates the Pareto principle.

If Prof. Garcia's and DeLong's critique of inequality is correct, then surely it should not take a lifetime of resolute effort to approach a fairer result, and in fact the Pareto principle does not even permit that. The Pareto principle entrenches plutocracy.

So, I am sorry, Professors, but when it comes to entrenched inequality, there IS a problem
with the Pareto principle.

UPDATE; Just to be clear that this is not just about envying wealth, let's consider in our land of unicorns and rainbows that we have had a Rawlsian conference in which we have agreed to relentlessly enforce equality of opportunity.  We then have a 10,000 year test run in which we reord the resulting distribution of wealth, which I'll call summation X.

We now go back into real history where we already have not had equality of opportunity, and we have any existing, different distribution of wealth.  The Pareto priniple forbids us from ever arriving at summation X.  A certain amount of wealth and assets can never be owned by those who should otherwise own them by dint of their efforts under conditions of equality of opporltunity. Why should we give our allegiance to such a principle?

======

P.S.: My primary solution to the above is to ignore the claimed utility as to heirs not yet in existence.  I have no problem with Bill Gates or Henry Ford passing on their wealth, minus a reasonable tax rate, to their children or grandchildren.  But by the time we get to great great grandchildren, inherited wealth should be taxed at confiscatory rates, e.g.,90%.  I would only apply this to that portion of wealth that is inherited.  If granddad leaves me $100 million, and by dint of acumen and industry I turn that into $1 Billion (after inflation) by the time of my death, only the inherited portion, i.e., the first $100 million, should be subject to the confiscatory rates.

Weekly Indicators for January 6 - 10 at XE.com

  - by New Deal democrat

This week's edition of Weekly Indicators is up at XE.com.

Real M2 continues to decelerate, and could turn into a negative indicator within the next several months. Consumer spending has also softened, although the Oil choke collar remains disengaged.

Unemployed and underemployed but want a job now

  - by New Deal democrat

Here is the measure of people who aren't in the labor force because they aren't looking for a job, but say they "want a job now" (red) added to the unemployment rate (blue) and also (orange) added to the underemployment rate (green), current through this morning's employment report for December 2013:



I believe this a far more accurate way to look at the issue, as compared with EPI's "missing workers" estimate.

The numbers aren't pretty now, but note that they also weren't very pretty even before the recession.

BIG Employment Miss

From the BLS:

The unemployment rate declined from 7.0 percent to 6.7 percent in  December, while total nonfarm payroll employment edged up (+74,000),  the U.S. Bureau of Labor Statistics reported today. Employment rose  in retail trade and wholesale trade but was down in information.

This is in comparison to the AP job report that printed at 238,000.

Looking at the details, we see some very large holes in the jobs data.

Retail +55,000 (Remember, the data is seasonally adjusted, so this takes the holiday hiring season into account).

Professional employment increased 19,000 in comparison to a 2013 monthly average of 53,000

Other categories growth was equally paltry.

Also consider the following hours worked data:

The average workweek for all employees on private nonfarm payrolls edged  down by 0.1 hour to 34.4 hours in December. The manufacturing workweek  was unchanged, at 41.0 hours, and factory overtime edged up by 0.1 hour  to 3.5 hours. The average workweek for production and nonsupervisory  employees on private nonfarm payrolls edged down by 0.1 hour to 33.6 hours.

Finally, there is the issue of the drop in the unemployment rate, which went from 7%-6.7%.  The reason is the drop in the civilian labor force from 155,284,000 to 154,937,000.  Put another way, expect to hear more about "people running from the US labor market."

A final caveat from Bonddad: I've grown to give this monthly data point release less and less importance, instead focusing on the broader employment picture -- which is still miserable.  However, from a practical side, this data point will move the markets because of the size of the miss and the fact it contradicts the "US economy is getting stronger" narrative we've been seeing over the last few months.

Why I think EPI's "missing workers" claim is wrong, and maybe close to impossible

 - by New Deal democrat

[Update: graphs and links now added.]

Today we will get the final employment report for 2013, and the alternative claims are already starting.  For example, yesterday Naked Capitalsim is claiming that people over 65 are working more because they can't retire.  Even though almost every aging Boomer will tell you that they'd like to work part time after 65 to keep mentally active and socially involved.  And those who stayed the course with their 401k's since 2008 have more worth in them now than before the recession.  And elderly life expectancy has improved dramatically in the last 30 years.

But the real issues are wages and the unemployment rate among working age adults.

Let me start by saying that the current rate remains unacceptably high, and Washington should have done far more (like a new WPA for infrastructure repairs, like Bonddad and I suggested four years ago!).  But that doesn't excuse faulty methodology in service to a good cause.

And that's what brings me to the Economic Policy Institute's "missing workers" report", which claims to measure the "real" unemployment rate.This was introduced a few months ago, and has gotten a lot of attention on progressive blogs since.  It purports to show that the number of "missing workers" who want a job but have dropped out of the labor force, has continued to increase, to as high as 6 million a few months ago.  Unlike virtually every other measure of the unemployment rate, it has shown virtually no improvement in the last 3 years, as shown in their accompanying graph:



There are at least 2 major problems with their methodology.  First of all, as I already described several weeks ago, the Census Bureau asks a question in the Household Survey each month designed to elicit exactly what the EPI says it is measuring; namely, those who are "Not in [the] Labor Force, [but] Want [a] Job Now," or series "NILFWJN."  Even in the best of times, about 4.6 million people tell the Census Bureau that they fall into that category, as shown in the graph below where I have subtracted that number to norm it to approximately zero in 2006 and 2007, the same average number as the EPI graph [updated with this morning's information]:



Both series follow a similar trajectory through 2011, but the official Census Bureaur data never shows an increase of more than 2.4 million, and declined to 1.2 million in November, whereas EPI shows a total of 6 million in October of this year.

The second problem with the EPI's methodology is that it makes use of the less accurate, more erratic employment number from the Household Survey, rather than the Nonfarm Payrolls employment number from the BLS, which has a much larger sample size.  The issue here is that, since January 2012, the payrolls report shows that almost 4 million jobs have been added to the economy.  The Household survey, however, shows only 2.8 million jobs added, a deficit of 1.2 million jobs.

Almost everyone concedes that the nonfarm payrolls employment number is more accurate.  Further, most economists expect the more erratic Household Survey number of employed to resolve closer to the trend in the Payrolls report.  Ordinarily, that's not a problem.

But because the EPI's "missing workers" methodology compares job growth against a target (projected civilian labor force from 2006), EPI essentially makes that entire 1.2 million difference part of the enhanced unemployment figure.  To cut to the chase, if the EPI's report made use of the nonfarm payrolls number for employment, their alternate unemployment measure would have fallen by about an additional 1% in the last couple of years, and would be following a similar downward trajectory as virtually every other measure of unemployment.

In fact, if the nonfarm payrolls reports are accurate, then EPI's measure becomes virtually impossible.  That's because, as shown in blue in the graph below, the population increase for those age 16 and over since the beginning of 2010, the bottom for employment in the Great Recession, is about 8 million.  The Payrolls report shows 7 million jobs added, or about 87.5% of the entire working age population increase.

For so long as the statistics have been kept, the biggest percentage of the population age 16 and over that has been employed is about 64.5%, which applied to 8 million is 5.2 million:



In other words,  even under the most pessimistic scenario that can be concocted using the nonfarm payrolls number, the entire working age population plus about 2.0 million people have found jobs in the last 4 years, and 92% of the 4.3 million growth sonce January 2012, or about 1.2 million more thn the most pessimistic employment to populatioin reading. that is a -0.8% decline in the unemployment rate even before we take into account retiring Boomers, just in the last 22 months.  But the EPI measure only reigsters a decline of -0.3%, including retiring Boomers.

Put another way, if the nonfarm payrolls numbers have been correct, the number of total unemployed including those so discouraged they stopped looking for owrk should have decreased by several million since the beginning of 2012..  And yet the EPI measure has the total number of missing unemployed workers rises almost relentlessly throughout that period, almost completely offsetting the number of officially unemployed workers.  That's not just wrong, if the nonfarm payrolls report is correct, it's impossible.

Maybe EPI has good explanations for these issues.  But without more, it is difficult to see why we shouldn't just accept the official Census Bureau report of those who say they aren't looking (and so aren't in the labor force), but want a job now.  The number will be updated later this morning, and I'll have an updated graph that includes that measure for both the U-3 and U-6 (part time and marginally attached workers) metrics.

A rare stock market forecast for 2014

  - by New Deal democrat

I have a new post up at XE.com, commenting on recent speculation about a stock market crash vs. a pullback due to valuations in 2014, based on YoY corporate profits in 2013.

2014 forecast: a year of deceleration

  - by  New Deal democrat

My method of foecasting is pretty simple. In fact, so simple, I call it the K.I.S.S. method. Even though the LEI is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly-paid punditocracy, especially at turning points.

Since I'm not a highly paid Wall Street pundit, I simply rely upon the LEI for the short term, and the yield curve for the longer term with the caveat of watching out for deflation. The simple fact is, with one exception, if real M1, and real M2 (less 2.5%), are positive, and the yield curve 12 months ago was positive, the economy has always been in expansion. When real money supply is negative, and the yield curve was inverted 12 months ago, the economy has always been in contraction. The exception is that the yield curve does not help to project the economy 12-16 months later if the economy at that later date is in deflation - as it was in 1930-32 and late 2008 and early 2009.

In the few years I have also learned a lot about the methods of the late Prof. Geoffrey Moore, the founder of ECRI, so I also intergrate his findings about short and long leading indicators into my forecast. 

This year the forecast methods are consistent for the first 6 months:  growth will continue.  It is in the last half of the year, and particularly in the 4^th quarter, that there is more difficulty.

First of all, let’s look at two overlapping but different forecast algorithms with a time frame of approximately 6 months ahead:  the Conference Board’s Index of Leading Indicators, and ECRI’s Weekly Leading Index.

Here is a graph of the LEI via Briefing.com

And here is ECRI’s WLI via Doug Short:

Both of these are forecasting continued growth over the next 6 months.  In fact, the LEI has actually picked up strength in the last several months.

One big difference between the two measures is that the LEI uses housing permits and starts (actually a long indicator) as a component, while the WLI uses the Mortgage Bankers’ Association’s purchase mortgage application index as a component.  After sideways movement for most of the year, housing permits unexpectedly rose strongly in October, and maintained that level in November.  On the other hand, purchase mortgage activity has made new post-recession lows due to the increases in interest rates.

One other item worth noting is that there does not appear to be any big surge in gas prices (outside of the seasonal norm) forecast, so inflation should be kept in check, so there should be no “oil price shock” to the economy.  Also, it appears that Washington plans on leaving the economy alone this year, so there will not be any new drag from austerity or, one hopes, from a refusal to pay the bills already incurred.

But the LEI and the WLI do not forecast more than about 8 months out.  For that we need to look at the long leading indicators.  There are two separate ways I look at this.  First, when the yield curve and real money supply as measured by M1 and M2 are positive (+2.5% in the case of M2), the economy has always expanded one year later (provided there is no deflation), including during the pre-WW2 era that may be more applicable to today’s economy.  By contrast, when both measures are negative, a recession has always ensued.

First of all, here is the yield curve, as measured by 10 year treasury rates minus 6 month treasury rates:

Note that these reliably inverted (i.e., the result was negative) a year or more before the onset of each of the last three recessions (and the same is true of prior post-WW2 recessions).  As you can easily see, the yield curve has steepened considerably in the last 8 months, entirely due to the increase in yields for the 10 year Treasury note.  Provided we do not expect deflation in the final part of this year, this should mean clear sailing.

Now let’s take a look at the 4 long leading indicators identified by Professor Geoffrey Moore and at least until recently, the components of ECRI’s “long leading index.”  These are:  corporate bond yields, inverted (blue), housing permits (red), corporate profits (green), and Real M2 (orange):

Three of the 4 of thee indicators are absolutely positive, but at the same time all 4 have decelerated, as highlighted in this next graph, which measures the YoY% change in the same items:

Interest rates for corporate bonds have increased, meaning that indicator has turned negative.  If present trends continue, and based on the last 50 years of history, the odds are extremely good that they will, housing permits will turn negative at some point in the first half of this year.  Similarly, if their current trend continues, real M2 will also fall below +2.5% (although I emphasize that I have no data helpful as to whether M2 will or won’t).  Corporate profits are a total question mark, although we will begin to get an answer as Q4 earnings are reported over the next month or so.

Finally, here is a look at Real M1:

This too has been decelerating, although it remains very positive.

In conclusion, unless we expect deflation (and right now I don’t), there is every reason to view the long leading indicators, under either method, as being in agreement that the economic expansion will continue through the end of 2014.

On the other hand, the deceleration of most of the indicators, and also the deceleration of the WLI, cause me to believe that the second half will be considerably weaker than the first half.  If the long leading indicators turn negative quickly enough and significantly enough, it is possible that we could enter into a recession in Q4.  Before ruling that out, I want to see how 2013 Q4 corporate profits play out, as well as the next couple of months of housing and money supply data.  But subject to that caveat – that there are mounting reasons to be concerned about 2015 – I look for continued positive readings in employment, wages, industrial production, and GDP through the year.

I can’t help noting that my contrast for decelerating growth is at odds with that of many luminaries, including Paul Krugman, Bill McBride a/k/a Calculated Risk, Muhammed el-Arian of PIMCO, and Menzie Chinn of Econbrowser.  Morgan Stanley went so far as to call the economy “ready for launch.”

My critique of these optimistic calls is what I laid out at the outset of this article:  all of these forecasts, to a greater or lesser extent, engage in coincident-trend-following.  Morgan Stanley’s note, for example, cites the coincident indicator of freight transportation, as well as the short leading indicators of the ISM survey and capex spending.  Several others take similar tacks. 

And although I have great respect for both Bill McBride and, of course, Krgthulu, both of them rely on an acceleration of the housing recovery.  For example, Krugman says, “housing is still moving forward.” 

I always caution against using the present progressive tense without extreme care when it comes to economic data.  What we know is that housing permits and starts made new highs in October, although permits pulled back slightly in November.  We also know that the trend in 2013 was of decelerating growth, as I’ve set forth above.  And nearly every other measure of housing, except for prices, has taken it on the chin.  In addition to purchase mortgage applications, pending sales just went negative YoY.

So, just as I was an outlier to the chorus of Doom beginning at the end of April 2009, I am afraid I am going to have to withhold my cheers now.  My forecast is that 2014 will be a year of decelerating growth.

Upper 90s-100 Area Still Tough on Oil Prices

With the exception of the summer driving season (roughly late May - late September), oil prices have met with still resistance in the upper 1990s/100 price area.

International Week in Review

Last week, the big news was from the manufacturing sector, which was the primary driver of most market activity.  Here's a link.

Weekly Indicators for Dec.30 - Jan. 2 at XE.com

  - by New Deal democrat

My Weekly Indicators column is up at XE.com.  The coincident data looks good, but deceleration in the long leading indicators shows signs of spreading to short leading indicators.

Real money supply: significant deceleration, but still positiive

  - by New Deal democrat

It won't be a surprise to anyone who reads my "Weekly Indicators" column that I have something of a bifurcated outlook for the economy.  The short leading indicators have generally been very positive (and manufacturing got two excellent numbers in the past week), while the long leading indicators have cooled considerably -- but are still positive.

Real M2 is a perfect example of this issue.  It was one of Prof. Moore's original 4 long leading indicators, and was part of the LEI for several decades before being dropped a couple of years ago.

Below is a graph of real M2 since 1980.  The red line is at the level of +2.5% YoY:



As you can see, on the one hand it has decelerated considerably from its peak about 2 1/2 years ago.  As of yesterday's New York Fed report, for the week it is at about +4.3% YoY.  Which, of course, is still comfortably above the +2.5% level below which, if it remains for a several quarter period, is necessary but not sufficient to signal an oncoming recession.  In fact, it is probably above its average level for the last 30 years.

My gut feeling is that it will continue to decelerate.  But it is just that:  a gut feeling, and nothing on which to base any hard analysis.

Calculated Risk and I have made a bet on housing's direction in 2014

  - by New Deal democrat

Bill McBride, a/k/a The Nicest Blogger on the Internet, and I have almost always seen eye-to-eye on the matter of housing.  Both of us thought that housing was in a bubble in 2005.  Both of us thought in 2011 that housing prices would bottom in early 2012.

But we have totally different opinions about the direction of housing in 2014.

In his forecast for 2014 residential investment, CR says, "I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013."

By contrast, several weeks ago, in a post at XE.com, I said that "If the typical past pattern is followed, we will shortly see permits running 100,000 less than one year previously."

This is quite a difference.  Bill expects sales and starts to average about 1.150 million annualized this year.  I expect that at some point permits and starts will sink under 900,000 annualized.

The difference is one in approach.  Bill's post argues from the fundamentals:

 demographics and household formation suggest starts will return to close to the 1.5 million per year average from 1959 through 2000. That means starts will come close to increasing 60% over the next few years from the 2013 level.

 From there he deduces his forecast of 20% this year.

While I agree with CR over the long term that demographics and pent-up demand are a tailwind behind the housing market, my argument stems from strong past correlations of increases in interest rates and decreases in housing demand.  The graphs I posted in the XE.com article show 15 occasions in the last 50 years that interest rates have backed up by at least 1% YoY.  On 12 of those occasions, housing permits fell by at least 100,000 shortly thereafter.  Those are pretty good odds.

When one compares mortgage rates and housing permits, as in the below graph covering the last 40 years, the relationship is even stronger:



Of the 9 previous times in the last 40 years that mortgage rates have increased by 1% YoY, housing permits fell by at least 100,000 YoY on 8 of those occasions.  The 9th time, briefly during the bubble year of 2004, was followed by a YoY decline of -65,000 permits in spring 2005.

My working principle is to look at the data in as dispassionate and detached manner as I can, and to default to the idea that "it's not different this time."  Although permits have not even turned negative YoY at this point, their improvement has decelerated considerably since the low of interest rates in 2012.

So here are the terms of our bet:  If starts or sales are up at least 20% YoY in any month in 2014, I will make a $100 donation to the charity of Bill's choice, which he has designated as the Memorial Fund in honor of his late co-blogger, Tanta.    If housing permits or starts are down 100,000 YoY at least once in 2014, he make a $100 donation to the charity of my choice, which is the Alzheimer's Association. 

Note that since our forecasts are not mirror images of one another, it is possible that both or us will win this bet.  Or neither!  And to be honest, since my forecast implies a weakening economy, probably with less hiring and wage growth, I hope I lose.

But I think this frames the biggest US economic issue of 2014 - will the rise in interest rates derail economic growth? - in a succinct manner.