Commodity Supercycle Dying As Monetary Stimulus Subsides

Commodity prices crashed during The Great Recession (as expected). However, commodity prices began to surge following The Great Recession, thanks in part to the massive monetary expansion by The Federal Reserve.


Commodity prices largely peaked in early 2011 and have really hit the skids since June 2014. West Texas Intermediate Crude Oil Prices reflect the end of the commodity super cycle as well.


Let’s see if December’s FOMC meeting will be called “Standoff at the Cemetery” given the death of the commodity supercycle.


Thanks as always to Jeese of Jesse’s Cafe Americain blog.

Fed’s Williams sees strong case for December interest-rate hike (With 94+ Million Not In Labor Force?)

Reuters reported that “Fed’s Williams sees strong case for December interest-rate hike.”

There is a “strong case” for raising interest rates when Federal Reserve policymakers meet next month, as long as U.S. economic data does not disappoint, a top Fed official said on Saturday.

“The data I think have been overall encouraging, especially on the labor market,” San Francisco Fed President John Williams told reporters after a conference at University of California Berkeley’s Clausen Center.

Let’s see if The Fed’s Williams is correct.

If we look at the U3 unemployment rate and jobless claims, both have returned to levels prior to The Great Recession (although it took a hell of a long time since The Great Recession ended in June 2009).


On the other hand, the U6 underemployment rate still remains above the highest levels from 2000-2008.


In terms of NATURAL rates of unemployment, the U3 unemployment index resides BELOW the natural rate of unemployment.


And with so many jobs being created (non-farm payrolls) and U3 unemployment rate lower than the natural rate of unemployment, why is wage growth so low?

Here is one reason why wage growth is slow. This chart reflects the number of unemployed in the US combined with the number of people not in the labor force. This is the number of NON-WORKING Americans. This number has been fairly level since 2009.


The good news is that YoY growth in non farm payroll jobs have mostly been higher than the YoY growth in NOT in labor force in 2015. Except for the last report.


So what will be released in the next jobs report that will be so stunning? I sincerely doubt if there will be any significant movement upwards in wage growth, particularly if the jobs added are in the low realms of wages. Sorry, john, I just don’t see the recovery, at least in terms of wage growth when there are over 94 million NOT in labor force.


Not So Fast, Fed! Atlanta Fed Q4 GDP Growth Drops To 1.8% (As Core PCE Growth Drops As Well)

Not so fast there, Federal Reserve. Your December rate hike optimism might be premature.

According to The Atlanta Fed’s GDPNOW tracker, Q4 GDP has slumped to 1.8%.


This comes after core PCE YoY fell again, below The Fed’s 2% target rate.


And with Mortgage Purchase Applications, M1 Money Multiplier and M2 Money Velocity in a slump, is it wise for The Fed to raise rates in December?


Go ask the witch doctor!


New Home Sales Rise 10.74% In October As Median Price Falls -5.2%

Good news for homebuilders! New home sales rose 10.74% in October.


However, median prices for a new home sale fell -5.2%.


The growing new home sales are look different than the flat-lined mortgage purchase applications index.


The Northeast saw a 135% increase in new home sales while The West saw a 1% decline. I admit, homebuilding in San Francisco and Los Angeles remains a chore when housing is unaffordable in terms of rising home prices and falling family incomes.



Core Personal Consumption Expenditures YoY Fall To 1.28%, Below Fed’s Target Inflation Rate

Today’s report on the economy concerning personal income, spending and durable goods orders is the last one before The Fed decides to raise rates in December.


If The Fed is using their 2% inflation rate target a guidance, they should look at today’s core personal consumption expenditures YoY. It fell to 1.28%, well below The Fed’s target inflation rate.


And then there is the durable goods orders. Specifically, Capital Goods New Orders Nondefense Ex Aircraft & Parts YoY NSA fell -1.2% YoY. That is the 7th month in a row that capital goods new orders have fallen.


Yes, real GDP growth is above 2% and personal income rose 0.4% in October and unemployment is down to 5%. On the other hand, U6 underemployment is at 9.8%, 94.2 million are NOT in the labor force, and The Fed can’t generate inflation to save its life.

So what will Janet Yellen (with cigar) and Stanley Fischer do at the next meeting of the Open Market Committee?


The New Low Multiplier: Mortgage Purchase Applications Down 56% Since 2004 (The Subprime Effect)

The US residential mortgage market hasn’t been the same since subprime lending (and other assorted innovative mortgage financing products) peaked during the 2004-2007 period. October 2004 was the peak of the mortgage purchase applications index which now dwells at 211.70, nearly a 56% decline.

Here is a chart of mortgage purchase applications since 2000. Note the crash in the M1 Money Multiplier as The Fed massively intervened in the financial markets and subprime lending mostly disappeared. Nothing has been the same since.


But back to the current state of the mortgage applications.

Mortgage applications decreased 3.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 20, 2015. The previous week’s results included an adjustment for the Veteran’s Day holiday.

The Refinance Index decreased 5 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index increased 5 percent compared with the previous week and was 24 percent higher than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.14 percent from 4.18 percent, with points increasing to 0.49 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

So, there you have it turkey day fans! A listless economic recovery combined with mortgage regulations have produced a genuine turkey of a mortgage market.


Will Fed Raise Rates With Zero Inflation? The Zero Velocity Economy

The Federal Reserve has a target inflation rate of 2%. Whether we use CPI YoY or Personal Consumption Expenditures YoY, the US economy is no where near 2%. Currently, the core personal consumption expenditures YoY are growing at only 1.31%, no where near The Fed’s target rate for inflation.


How can this be, you ask? Look back in 2008 (left hand side of chart) where core inflation was about 2.4% and excess reserves were low. The problem is in 2013-2015. Excess deposits have been growing faster than the funds can be loaned out. This translates into declining inflation.

True, auto and student loans have been growing in recent years, but these are not enough to generate inflation. The excess reserves remain trapped in the Federal Reserve System. This is another reason why mortgage purchase applications are low.


Then there is the CRB Foodstuffs index.


Inflation? What inflation??