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Friday, August 30, 2013

The Obvious Goes Postal

Maybe the alternate title for this one is "The Fed Is Hoist By Its Own Petard". 


The problem the Fed has is that both real and price-adjusted consumption are at or below their post WWII recession lines. Thus, withdrawing QE, if it does anything, would be expected to push the economy into a recession.

But the second problem the Fed has is that if it doesn't withdraw QE and the economy continues to recover, that all-essential green line (real consumption) is going to be hamstrung by inflation and the result will be to push the economy into a recession. Also business investment is doomed to be low because of the sharp rise in tax rates, especially on capital gains taxes.

Looking at the same graph, but with YoY changes in currency:
The economy is still compensating and not slumping, but it's scraping along with abysmally low expansion rates. The implication is that even minor inflation is too much for the market to bear, because it will push real consumption down too low to avoid a downturn.

So why is real consumption so low? Well, let's look at nominal employee compensation:

Despite financial-press talk about employment driving consumption, it's rather obvious that in fact it cannot. YoY changes in nominal employee compensation can only drive nominal consumption changes at about the same rate. Because most SS recipients are losing real income, it is only new disability and retirement awards that can add spendable income, and even at the current accelerated pace, it's not enough to push growth. It sustains it where ordinarily we would already have fallen through the thinning ice, but it can't do much more than that.

It's almost as if this thing is correlated or something. Take heart - this means most Americans are honest and don't steal for a living.

One of the results of the Fed's current QE binge has been the destruction of the housing market for most people. The price increases on property have exceeded what many first-time borrowers can pay, so the housing recovery is narrowing now to investor-dominated. This is not encouraging, because it implies for the Fed that either it must go Abe NOW - announcing QE this fall to continue for several more years at close to the current levels - or it must begin to taper and let the Black Rocks rock on down to their losses so individuals can participate.

Autos are exhausted (judging by used-car interest rates), and only the housing market is left. But you have to print a JACKWAD of money to keep an investor-led housing recovery going. If they choose that option, they need to go big time. We'll know by November. All bets are off.

My guess is that the Fed may go Abe now. They probably don't have the guts to take their medicine. I would in fact be sure, except for a minor technical problem.


If the Fed does go Abe (which is not going to work there, btw), the Fed should actually increase the monthly buy-in. A few small holes have developed in the business plans of the larger housing investors, and it takes a lot of monetary muscle to patch such holes. Here there's a problem. What do they buy? They're pretty well maxed out on Treasuries already. Mortgages don't offer them a solution either:


The problem with an investor-based housing recovery is that it doesn't generate the increase in mortgage bonds you need. Too much of it is cash-based, or direct borrowing from banks:


Maybe the Fed should just double down and directly buy the houses!!!! I'd recommend starting in Richmond, CA. They've got a very good stimulative plan in place - seize the property. Alternatively the Fed could just buy stocks.

If this weren't our economy, this would all be terribly funny. But it is our economy, so it is not.

The global economy has very much of an early 2008 feel to it. This next few months are going to be interesting.

Syria is of course a wild card, but if the president bombs Syria, he pretty much bombs the US economy. So don't expect the Fed to taper in September. I don't think it can. It must wait to find out what will be done on the debt limit, so it knows what the supply of Treasuries will be. And it must wait to find out whether oil is going to go to impossible levels.

I think the Fed has already lost control of the money supply, so they might as well taper ASAP. The duration of the adjustment matters as much as the adjustment itself. It's possible a sharp taper could trigger a massive expansion in the US money supply and a big upward move in oil rates (way to speculate on the USD if you don't want to be in stocks), but that would be self-healing. Also mortgage rates will be self-healing too. Because mortgage rates are already constraining sales, there is a natural shift down in mortgage rates. The cost would be a short downturn, but it would be short.

But I don't think the Fed is realistic at all.  I think they are now afraid of everything - as well they should be. By any realistic standard, the US economy is at its weakest point since the end of the recession.

Comments:

How do you figure the Fed is maxed-out on Treasuries? Treasury statistical shenanigans notwithstanding, as of last quarter the publicly-held debt net of Fed holdings was still increasing. Theoretically the Fed could purchase and extinguish the entire debt outstanding, could they not?

Sure, that'd be h**l on savers and retirees, but isn't that the point of Keynsian economics--to get those good-fer-nuthin hoarders to give up the cash?


 
My current forecast is that the Fed reduces asset purchases in September and begins raising the funds rate in March 2015.
 
Well, from your mouth to the Fed's ears, CF. I think that's what they ought to do, but I think they very well may not do it.

I don't think Bernanke wants to do it.
 
Neil - but Treasuries serve a fiscal function. There has been a lot of jawboning at the Fed about how they don't want to interfere with the market, but of course that's what they are doing.

If they bought all the Treasuries, I suppose they could put them out there on reverse repos to the banks. But there need to be sovereigns, or what do we use as hard liquid collateral?
 
M_O_M,

How about cash? Heck, just have the Fed inject cash reserves. Pay interest on them, if necessary. What relationship does money have to value in ZIRP nation?

We've already thrown out the baby, I'm not going to get all emotional over the bath water now.

 
"...let the Black Rocks rock on down to their losses so individuals can participate..."

No way will that be allowed to happen.
The off loading to the taxpayers has begun. This was their plan from the beginning.

http://www.bloomberg.com/news/2013-08-29/wall-street-s-rental-bet-brings-quandary-housing-poor.html

Eventually HUD will be handed the whole mess.

No one cares about fraud, bankruptcies, defaults, money laundering, endless credit, nothing.
When I first read about this person in L.A. who had refinanced four times, took on a second mortgage, put a Cadillac and Mercedes-Benz C300W in the driveway, racked up about $45,000 in credit card bills and other debts, went through two foreclosures and two bankruptcies and after all that was approved for a FHA mortgage, I thought the policy would be corrected.

Well it just got worse.

FHA has just decided that the waiting period between a recent bankruptcy and approval for a FHA mortgage would be reduced to one year and the bankruptcy would not even have to be finalized…

http://articles.latimes.com/2012/nov/14/business/la-fi-rebound-buyers-20121114

http://www.zerohedge.com/news/2013-08-20/has-it-been-year-you-filed-bankruptcy-then-mortgage-you

Is the government so determined to get money into circulation that it would encourage this type of behavior? Is this why college students can borrow every dime of their education? Is this why almost anyone can walk into a car showroom and drive out with a brand new car without putting any money down? Is this why bankers can commit major frauds and not be prosecuted? Is this why Medicare and Medicaid fraud is rampant? Is the why food card, Obama phones and disability awards are out of control? Is this why people will be granted subsidies on the new healthcare exchanges without income verification? Is this why bankers can launder billions in drug cartel profits and aid rogue corporations and nations avoid the Iran sanctions and not be prosecuted?

I think so.


 
MOM, Two questions please:

1. Why would "a sharp taper...trigger a massive expansion in the US money supply"? I don't see the linkage.

2. Please elaborate a bit on your comment re "way to speculate on the US dollar". Presumably a taper would raise US interest rates (USD+), but FX rates do not mechanically follow relative interest rates, do they?
 
Any taper will be short-lived, and the Fed won't ever raise rates (voluntarily).

Lack of Treasuries? DC will issue more.

There is no recovery, never has been, and the chickens are coming home to roost.
 
There will be no mortgage reform. It will be business as usual. How else can BlackRock dump the homes that they purchased.

"Under pressure from civil-rights activists, federal bank regulators have killed tougher mortgage rules requiring minimum down payments and credit scores for loans bundled into securities."

http://news.investors.com/ibd-editorials/083013-669443-regulators-mortgage-rules-subprime-securities-risk-retention.htm?p=full

 
There will be no mortgage reform. It will be business as usual. How else can BlackRock dump the homes that they purchased.

"Under pressure from civil-rights activists, federal bank regulators have killed tougher mortgage rules requiring minimum down payments and credit scores for loans bundled into securities."

http://news.investors.com/ibd-editorials/083013-669443-regulators-mortgage-rules-subprime-securities-risk-retention.htm?p=full

 
If you want tori me the pump and get money velocity
up, why not restrure the tax code to reduce taxes on domestic labor and increase taxes on imported finished
goods ? That would lower the cost of labor in relation
to capital and help create a more balanced economy.

Sporkfed
 
business investment is doomed to be low because of the sharp rise in tax rates,

I would also add that at the state and local level, increased taxation is killing the consumer.

I hope people see that if the gray bars in MoM's charts are removed, the trend is down down down. The sharp downturns and their recoveries are only a distraction to the structural problem.

I'm with sporkfed on reducing taxes on domestic labor, but raising taxes on imported goods only serves to avoid the structural problems.


 
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