New Home Sales Slow In June, Still Stuggling To Recover After Housing Bubble

New home sales rose, but modestly disappointed in June (610k vs 615k exp) with a small downward revision to May.

New home sales continue to climb … back to pre-housing bubble levels.of the early 1990s as do mortgage purchase applications.

Although the median price for new home sales fell over 4% in June, they are still up 52.2% since October 2010.

Remember all the cheerleading from the Mortgage Bankers Association (MBA) last week ove the massive surge in mortgage refinancing applications? In reality, refi applications are stuck in a rut since the last increase in mortgage rates.

Yes, we are still picking up the trash from the housing and credit bubble of the last decade.

The Gleaners by Jean-François Millet. Sort of.

M2 Money Growth Declines To 20 Month Low (What Happens To Wage Growth?)

Real median household income, one measure of American household prosperity, peaked in 1999, fell slightly in 2000, then declined in the early 2000s only to hit decade-peak in 2007. RMINC continued to fall again until 2012 when it finally started to rise.

What is notable is that the rise in real median household income in the 1990s corresponded with a rapid rise in the M2 money supply.from 1995 to 1999. That represented a 33% in M2 money supply.

m2rminc.png

The rapid increase in M2 Money Supply also corresponds to the high in M2 Money Velocity in 1997, as if Fed Chair Alan Greenspan expended all the M2 fuel in one massive attempt to stimulate the economy.  M2 velocity (GDP/Money Supply) has been falling ever since. Along with real median household income. EXCEPT FOR 2013 AND AFTER WHEN REAL MEDIAN HOUSEHOLD INCOME ROSE EVEN AS M2 MONEY VELOCITY WAS SINKING LIKE A ROCK.

One possible explanation lies with the redesign of the income question in 2013 and onwards.

Starting in 2013 with a partial phase-in, which was fully implemented in 2014, Census changed the questions and the methods in calculating household income.

For example, Census, starting in 2014, began to “collect the value of assets that generate income if the respondent is unsure of the income generated.”

Also, the government started to use “income ranges” as a follow-up for “don’t know” or “refused” answers on income-amount questions.

So, that is a partial explanation for the anomoly of rising real median household income with crashing M2 Money Velocity. THEY CHANGED THE HOUSEHOLD INCOME DEFINTION.

M2 Money growth has fallen to a 20 month low  while an alternative measure of money supply, the Austrian money supply, just fell to a 105 month low. 

The “Austrian” measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler’s checks, and retail money funds).

Well, M2 Money supply increases hasn’t done much for Average Hourly Earnings of Production and Nonsupervisory Employees, particularly since 2008.

Whether we are using the decline in M2 growth or Austrian money growth, neither one have benefitted the majority of Americans.

Intel and Delta Airlines Lead US In Underfunded Pensions (The Illlinois of Corporate Pensions)

Its not only State pension funds that are woefully underfunded (like Illinois at 43.4%), many corporate pension funds are worefully underfunded as well. 

The biggest offenders? Tech giant Intel and Delta Airlines (that includes the former Northwest Airlines, Western Airlines and parts of Pan American airlines) are the two most underfuded penions at 46.6% and 49.4% underfunded, respectively. So, Intel and Delta Airlines are the Illinois of the corporate pension world.

People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.

Of course, the percentage of workers covered by traditional defined benefit plans—those that pay a lifetime annuity, often based on years of service and salary—has been declining for decades as companies shift to defined contribution plans such as 401(k)s. But each time a pension plan is terminated, canceled or altered, thousands of workers are affected.

Last month, the 70,000 participants in the United Parcel Service Inc. pension plan learned they won’t earn increased benefits if they work after 2022. Late last year DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc. offered some former employees a lump-sum buyout to offload some of its pension liabilities. General Electric Co. has a major problem. The company ended its defined benefit plan for new hires in 2012, but its primary plan, covering about 467,000 people, is one of the largest in the U.S. And at $31 billion, GE’s pension shortfall is the biggest in the S&P 500.

So, it isn’t just State and Local government pension plans that are woefully underfunded. Corporate America.

What happens when the global central banks stop their monetary nonsense?

Just like the dinosaurs, pension fund recipients face a bleak future.

The Hangover: US Economy Still Suffers From The Housing Bubble Burst And Bad DC Policies

Bloomberg View has an interesting editorial entitled, “Yes, Financial Crises Do Bring Hangovers.”

In an essay making the rounds this week, four prominent academic economists and former government officials argue that something needs to be done to accelerate the pace of what they call “the weakest economic expansion since World War II.” Their recipe for speeding things up is lower taxes and less entitlement spending, and I’m not going to get into whether that’s really such a good idea, in part because I imagine lots of other people will take up that argument and in part because I just don’t know the answer.

But I was struck by the second paragraph of the piece, written by John F. Cogan, Glenn Hubbard, John B. Taylor and Kevin Warsh, 1 which goes like this:

We do not share the view that the recent period of weak economic growth was simply an inevitable result of the financial crisis. Economic recoveries tend to be stronger after deep recessions, and any residual headwinds from the crisis should have long been remedied had progrowth policies been adopted. Historically, some post-crisis periods are marked by lower economic growth, but we believe that the poor conduct of economic policy bears much of that burden.

It turns out both sides are correct. The housing bubble and subsequent financial crisis contributed to a weak recovery. And then economic policies following the housing bubble collapse focued on financial regulation and a terrible healthcare bill (aka, Obamacare) rather than creating economic growth.

The root cause of the financial crisis was the massive (and unsustainable) expansion of credit, particularly for real estate loans.  Thanks in part to 1) regulations such as Dodd-Frank and the creation of the Consumer Financial Protection Bureau and 2) a hangover from too much credit, real estate lending growth continues to be lower than any other recovery since World War II.

Commercial and industrial lending YoY is approaching recession levels.

And M2 Money Velolcity (GDP/Money Stock) continues to decline to the lowest level in modern times reflecting the stagnant GDP growth coupled with massive expansion of money stock.

Two examples of “The Hangover” are the 1) historically low levels of new homes sold and 2) the worst wage recovery since 1965.

Add into that the repression of bank deposit rates courtesy of Greenspan, Bernanke and Yelle, and we have a dismal recovery.

And lest we forget, the GINI index of income inequality increases after every recession, regardless of President and Congressional majorities.

Yes, the poor recovery of the US economy is a product of 1) hangover from the housing bubble and financial crisis, and 2) poor economic policies eminating from Washington DC.

US Treasury 10Y-2Y Slope Declines as Gold Rises

After a yield curve rally in late June that sent the 10Y-2Y slope almost to 100, it has started declining once again and is down to 91.425. But notice that gold rose today and continues to be generally inverse to the Treasury curve slope.

Inflation continues to be under The Fed’s 2% target and has averaged a meager 1.1% under Yellen’s management.

Here is Fed Chair Janet Yellen looking for 2% inflation and not finding it.

Debt Star! Trump May Need Obama’s Secret Debt Plan, Worrying Markets

So, President Obama had a secret plan to default on the US public debt all along. And President Trump may have to use it.

(Bloomberg) Deep within the Treasury Department sits a once-secret plan written by the Obama administration that could lead to the first-ever default on U.S. debt. Bond traders are worried that Donald Trump’s Treasury secretary may have to use it.

The U.S. government will reach its statutory limit on borrowing some time in October, the Congressional Budget Office estimates. The Trump administration has asked Congress to raise the ceiling before then, but it is running into the same complications the Obama White House encountered: lawmakers, mostly Republicans, who want to use the debt limit as leverage for controversial policy changes.

Treasury Secretary Steven Mnuchin has said there are “plans and backup plans” to keep the government solvent through September. Bond traders suspect he is referring to preparations made in 2011 in case the Obama administration had to prioritize payments on government securities over other obligations. The Treasury chief got fresh hope that Congress may raise the debt limit before leaving for its August recess after Senate Majority Leader Mitch McConnell delayed the break by two weeks.

Yes, Congress and the US Treasury has a debt problem. Explosive debt, thanks to chronic spending by Congress, will really be facing a problem if Treasury rates rise.

Healthcare spending (such as Medicare) is growing exponentially.

Leading to a CBO forecast of over $30 trillion in the near future.

And then we have the massive underfunding of government pension plans which will require bailouts by taxpayers. Look at Illinois, for example at 40% funded.

The good news is that markets aren’t pricing in excessive debt … yet.

With Senators like Maria Cantwell running things in Congress, how bad can it be?

Moody’s Down Grades Hartford CT As Wage-to-Cost Of Living Gap Drives Household Debt Growth

Despite what is touted by the Federal Reserve (debt is good!), states and municipalities are drowning in debt. As are US households.

Moody’s Investors Service has downgraded the City of Hartford, CT’s general obligation debt rating to B2 from Ba2. The outlook is negative.

The Hartford General Obligation bond is at 6.971% based on $82.768.

The rating was placed under review for possible downgrade on May 30, 2017. The par amount of debt affected totals approximately $550 million.

The downgrade reflects the increased likelihood that the city will pursue debt restructurings to address its fiscal challenges. Last week, the city hired a law firm to advise it on debt restructurings. City management has made public statements indicating they will need to have discussions with bondholders about restructuring its debt regardless of the outcome of the state’s biennial budget as debt service costs escalate sharply leading to budget deficits over the next five years.

The rating also reflects the city’s challenging liquidity outlook in the current fiscal year and weak prospects for achievement of sustainably balanced financial operations. The city currently projects a fiscal 2018 deficit of $50 million and is seeking incremental funding from the state to close that gap. The state has not yet adopted a budget specifying aid for the city for the fiscal year beginning July 1. Even if the state’s biennial budget allocates sufficient funds to address the current and following years deficits and create a fiscal oversight structure, the budget is still unlikely to provide a pathway to structural balance over the longer term. City deficits, partially attributable to escalating debt service costs, are projected to grow to $83 million by 2023, making the city’s weak financial position vulnerable to further deterioration.

Rating Outlook

The negative outlook reflects the possibility that the city will restructure its debt in a way that will impair bondholders. The outlook also incorporates uncertainty over state funding in the current fiscal year and beyond and the associated impact on reserves, liquidity and the ability to achieve sustainably balanced operations.

That is the City of Hartford that is in trouble due to excessive debt relative to tax receipts. But what about US households?

The rising cost of living relative to wage growth is leading to excessive debt use to maintain a standard of living.