Et Tu, Janet? Preview Of Tommorrow’s Fed Open Market Committee Meeting (Stagnant Wages, Rising Asset Prices)

Tomorrow is another meeting of The Fed’s Open Market Committee (FOMC) where the decision to rate the Fed Funds Target and whether to continue tapering Treasury and Agency MBS purchases will be decided.

Here is a primer of what I hope The Fed is looking at.

M2 Money velocity keeps declining and real GDP growth is on a downward trend, despite historic lows for The Fed Funds Target and historic highs for Fed Asset Purchases.


Despite enormous accommodation by The Fed, real median household income has declined/stagnated, average hourly wage earnings growth (YoY) is almost 50% lower than it was in 2009 and mortgage purchase applications are depressed.


Meanwhile, asset prices are growing (such as the S&P 500 index, the Case-Shiller 20 Metro home price index and the Moodys/RCA CPPI Composite Indices National All Property commercial real estate index.


Declining/stagnant wage growth, rapidly rising asset prices. What can go wrong?


Pending Home Sales Decline 1.1% in June, Down 7.3% From June ’13 (Abrupt End To The Rally)

The pending home sales recovery rally came to an abrupt halt in June, declining 1.1%.


Pending home sales are 7.3% lower than in June 2013. The PHS rally from 2010 to 2013 came to an end when mortgage rates rose in May 2013. A new rally ended quickly in June.


Why The Housing Recovery Has Been So Muted: Median US Household Wealth Has Fallen 43% Since 2007

The Federal Reserve’s zero interest rate policies (ZIRP) including quantitative easing (expansion of The Fed’s Balance Sheet of assets) has had a positive effect on asset markets. The S&P500 index continues to soar after QE began in 2008.


House prices have also started to soar since 2012 (a delayed reaction partly due to the staggering inventories of foreclosed houses on the market).


As I pointed out yesterday, real median household income and average hourly earnings growth YoY have not recovered despite The Fed’s intervention.



Now we find out from a Russell Sage Foundation report that median household WEALTH has not recovered either. In fact, median household wealth has declined 43% since 2007.


In fact, all percentiles reported have lost ground since 2007, some more that others.


And despite the chatter on the news channels that the US recovery complete, bear in mind that the unemployment rate (U3 and U6) are still above 2007 levels and labor force participation is far lower.


The US economic and housing recovery is muted (as least SOME analysts are conceding that point) and the reason is the enormous wealth and income destruction following the housing and credit bubble during the last decade.


As Marty Stuart and Travis Tritt sang “This one’s gonna hurt you for a long, long time.”


Reforming the Federal Reserve on its 100-Year Anniversary And The Low Velocity “Recovery” (Fed Policies Aren’t Working For Main Street)

Jeb Hensarling (R-TX) of the House Financial Services Committee held a hearing on July 10th to discuss legislation to reform the Federal Reserve. Or “Defanging The Fed.”

SIFMA had a nice summary of the hearing.

Rules-Based Policy: Taylor argued that the Federal Reserve’s failure to follow a rule-based policy in years past contributed to the financial crisis.
Federal Reserve Independence: Johnson stated that subjecting the Federal Reserve to GAO audits would have a “chilling effect” on the Fed’s independence and expose its processes to partisan influence.
Accountability and Congressional Hearings: Rep. Garrett and Rep. Stivers insisted that it would not be overly burdensome for Chair Yellen to appear before Congress at least quarterly.
Stress Tests: Calabria criticized the over-reliance on stress tests, and advocated for wider use of leverage rations instead.
Cost-Benefit Analysis: Johnson argued that cost-benefit analysis would only slow down the regulatory process and create “procedural stumbling blocks.”
International Negotiations: Rep. Neugebauer expressed concern that decisions by the Financial Stability Aboard impact U.S. policy without Congressional oversight.
Quantitative Easing and Interest Rates: Johnson said that with higher interest rates, unemployment rates would have remained higher and the recession would have been prolonged.

Of course, nothing will happen. Even if the House passes some form of legislation to reform The Fed, the Senate under Harry Reid (D-NV) will never pass any reform bill. Like Federal housing policy, The Fed is a protectorate and tool of Congress and the Administration.

What has NOT mentioned during the hearing was what I call the Low Velocity “Recovery.” So, here are some charts of what The Fed’s massive intervention in the financial system has NOT helped (mostly because of structural problems in the economy that low rate policies can’t fix).

M1 Money Multiplier is below 1. This means that very dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.


Excess reserves of depository institutions keep on rising.


M2 Money Velocity keeps declining and is the lowest in recorded history.


For an interesting take on money matters, Arthur Cutten has an interesting piece at Jesse’s Cafe Americain called “Green Slime: The Return of Franken-money.”

Despite the low rates induced by The Fed, bank credit growth is no where near it’s levels during the housing and credit bubble.


Mortgages outstanding have finally started growing again (barely).


Homeownership continues to fall despite The Fed’s low rate policies.


Real median household income hasn’t been helped by the massive expansion in The Fed’s Balance Sheet. It is now lower than in 2007, before The Fed’s massive intervention.


Average hourly wage earning growth YoY is almost 50% lower than before The Fed’s dramatic intervention.


The list goes on and on. Basically, The Fed’s actions have helped asset prices zoom (like the S&P500 and house prices), but has done virtually nothing for Main Street USA.



Unless the structural problems facing the USA are fixed (e.g., over-regulation), the economic recovery will likely remain a low velocity recovery for Main Street USA. Particularly with the Environmental Protection Agency on a roll.

It is a bizarro world where Fed policy is seemingly only helping wealthier Americans while Main Street continues to suffer.


Another Brick In The Wall: China Slowing, Luxury Goods Moet Hennessy Louis Vuitton Falls By Most In 3 Years (US Durable Goods Orders Negative YoY)

Yesterday, new home sales fell 8.1% in June and are back to 1982 levels. Of course, housing pundits all chortled “Not to worry. Employment has dramatically improved so new home sales will come back shortly.”

It would help if the main street economy improved and wages actually showed real growth (real average hourly wage earnings are now NEGATIVE YoY).


Throw in the June durable goods orders report that are NEGATIVE YoY (-1.6%) and perhaps the housing pundits should show a little less enthusiasm.


Another brick in the wall to the US economic recovery is the slowdown in it’s trading partner China.

July 25 (Bloomberg) — LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury-goods company, fell the most in almost three years, sending shares of peers tumbling, after earnings missed estimates amid weaker consumption in Asia.

The shares plunged as much as 7 percent in Paris, the steepest intraday drop since Sept. 22, 2011. First-half profit from recurring operations fell 5 percent to 2.58 billion euros ($3.5 billion), LVMH said yesterday after European markets closed, less than the 2.76 billion-euro median analyst estimate.

Asian demand weakened “quite significantly” in the second quarter, led by slower Chinese spending at home and abroad, Chief Financial Officer Jean-Jacques Guiony said on a conference call. So-called organic sales slumped 11 percent in Japan, after gaining 32 percent in the first quarter before a 3 percentage- point increase in that country’s value-added tax.


Slowing China spending domestically and abroad is not good news for the US economy, unless it means that more Chinese millionaires will buy more expensive homes in California.

Never fear Moet Hennessy! Mr. Kim Kardashian (aka, Kanye West) will keep on drinking your cognac.


New Home Sales Decline 8.1% In June, Back to 1982 Levels (But Average Price on New Home Sales Rises 3.53%)

New home sales for June declined 8.1% from May and are back to 1982 levels.


Even though MoM new home sales are down 8.1%, the average price of a new home is up 3.53%.


Well, THIS chart isn’t a good sign!


Speaking of bad signs, at the signpost ahead, the next stop is “The Twilight Zone.”


Something Wicked! Initial Jobless Claims Fall To Pre-recession 2006 Levels, But Real Wage Rate Growth Still Depressed (Now Negative)

Ray Bradbury’s masterpiece “Something Wicked This Way Comes” is about a mysterious circus that comes to a small town with evil intent. Much like the vaunted jobs recovery.

Initial jobless claims fell to 302,000, a level not seen since 2006. That is indeed good news!


But the Something Wicked part of the story is that average hourly wage growth YoY is down almost 50% since 2007 (and is currently at an anemic 2% rate, lower than the inflation rate. Average hourly wage earnings YoY are down 50% since 2007. And real median household income is lower than it was in 2007 and is back at 1995 levels.

REAL average hourly earnings YoY is now negative and has not been above 1.3% growth since 2009.


Yes, something wicked has ridden into town.