Iron Man: US Stock Market Ignoring Negative Economic Surprises

The US stock market has shown great resilience in the face of negative economic news in 2015. Or the stock market is overpriced and is not reacting to negative news.

Take for example the S&P 500 index plotted against the Citi Economic Surprise Index. Since late January 2015, the economic news has been worse than expected (surprise!) yet the S&P 500 keeps on rising.

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How about equity flows?

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How about the Q1 GDP forecast? It has been crashing but the S&P 500 index keeps on climbing!

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So how about Q2? Economists are calling for a “rebound” effect where consumers and business will bust out in terms of spending now that the frozen Q1 of 2015 is over. But will it?

Here is a chart of the Baltic Dry Shipping Index versus the average temperature at JFK Airport in New York City. New York City is warming up, but the Baltic Dry Shipping index seems frozen.

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The stock market’s performance helped by Iron Man (aka, The Fed) has not helped wages or income inequality.

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The US stock market is Iron Man. Or at least Janet Yellen is.

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Existing Home Sales Rise 6.1 Percent In March, Back to 1999-2001 Levels

Good news! Existing home sales rose 6.1 percent in March to reach levels from 1999-2001!

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From the National Association of Reators:

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February—the highest annual rate since September 2013 (also 5.19 million). Sales have increased year-over-year for six consecutive months and are now 10.4 percent above a year ago, the highest annual increase since August 2013 (10.7 percent.

Total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, down from 4.7 months in February.

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Getting back to 1999-2001 levels is no mean feat given that real median household income and average wage growth is lower today than in 1999-2001. Of course, The Federal Reserve has lowered its target rate for Fed Funds considerably as well.

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Yes, it has been a 2001-style Space Odyssey. We are finally back to pre-bubble existing home sales levels.

Below is a picture of The Federal Reserve Board of Governors discovering quantitative easing and Zero Interest Rate policies.

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Affordable? Home Rents Increase To 2.7 Percent YoY While Wage Growth Is 2.1 Percent YoY

I attended Fannie Mae’s Affordable Housing Advisory Council meeting on April 15th as a member. We were asked not to disclose what was discussed, but suffice it to say that the name “Affordable Housing Council” kind of gives it away.

In general terms, the “credit is too tight” theme was discussed by affordable housing advocates (not Fannie Mae management). Needless to say, I chimed in with the following chart showing that potential borrowers are worse off today than in 2001 or 2007 making it difficult to qualify for a mortgage according to DEBT TO INCOME (DTI) requirements in the face of rising home prices.

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But that only addresses the home ownership part of Fannie Mae’s business. What about their multifamily operations?

Well, the Consumer Price Indices for March were released today and the US CPI Urban Consumers Owners Equivalent Rent of Residences YoY rose to 2.7 percent. While this seems modest, bear in mind that average wage growth is only 2.1 percent YoY.

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Then we have New York Ciy where The median rent in Manhattan jumped 8.9 percent last month to $3,375, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Costs for studio apartments climbed 10 percent to a median $2,351, while rents for one-bedrooms rose 9.4 percent to $3,400, both the highest in more than seven years of record-keeping.

Nationally, apartment rents are growing at a 3.5 percent clip, according to REIS.

Let’s see. Super low interest rates combined with investors (foreign and domestic) coupled with households that are priced out of home ownership have created … high rents. If Jimmy McMillan of “The rent is too damn high Party” would run for mayor or governor today ….

So, Houston (or Washington DC), we have a problem. The CPI measure of “rent” is too low compared to observed rents. Home prices and apartment rents are rising faster than wages. Either wages have to start rising more than they have or home prices (and apartment rents) have to drop.

Here is what COULD cause home prices to fall. Baby-boomers are retiring and the GenXers and recent immigrants from Latin America don’t have the accumulated wealth or wages to purchase some of mondo-expensive big homes that America has grown accustomed to.

So, only mentioned my concerns about the housing market, wages, and the baby-boomers.

Or what I may call “Baby KABOOMERS.”

Here is a picture of Janet Yellen and Ben Bernanke injecting a typical renter with Fed stimulus that helps rents to rise and wage growth to stagnate.

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Industrial Production “Growth” MoM WORST Since End Of Great Recession

US Industrial Production numbers are out for March 2015 and they are ugly.

Industrial Production “growth” MoM fell more than expected to -0.6 percent.

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Utility output fell 5.9 percent, leaving it 3.6 percent lower year over year. This is no surprise, given that the weather in March moderated from record cold temperatures in February (as it does EVERY YEAR).

Mining and mineral extraction fell 0.7 percent, as the recent declines in oil prices have caused the energy sector to trim back activity, although this represents a moderation from declines of 1.6 and 1.7 percent in February and January, respectively. Utilities are now 3.6 percent lower from a year ago.

Alarm! Dive, dive, dive!

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Mighty Janet Strikes Out: Q1 GDP Growth At Zero, Value of New Orders For Consumer Goods Back To 2008 Crash Levels

Fed Chair Janet Yellen spoke this morning in Washington DC on the importance of labor mobility. Here is an exclusive video of her speech.

My favorite title from the conference is “The Role of Central Banks in Promoting Equality and Equality of Opportunity” by Joseph E. Stiglitz — University Professor, Columbia University. Yellen-Agenda-4-2-2015 (1) I didn’t realize that the conference featured stand=up comedy.

But getting back to more mundane topics like the US economy ….

As I have discussed before, the Atlanta Fed has their excellent GDP NOW page that tracks GDP growth within a quarter so there is no “surprise” on release. Q1 GDP growth is currently … zero.

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Citi’s economic surprise index for the US confirms that things are not joyous in Mudville, at least since January 1.

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And now we have more somber news supporting the Atlanta Fed’s GDP NOW analysis. The Value of Manufacturers’ New Orders for Consumer Goods Industries has fallen by an amount similar to the 2008 decline.

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While Bloomberg’s Rupkey says the labor market is “red hot” and Yellen babbles about labor mobility, I think of “Casey at the Bat: A Ballad of the Republic Sung in the Year 1888″, a baseball poem written in 1888:

“Oh, somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville — mighty Casey Janet has struck out.”

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Mortgage Purchase Applications Rise 7.6 Percent YoY (Good) But Remain 66 Percent Below 2005 Peak (Not So Good) Despite Fed “Magic”

Things are getting better in the residential mortgage market at least compared to last year, one of the worst ever.

Mortgage applications increased 4.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 27, 2015.

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The unadjusted Purchase Index was 7.6 percent higher than the same week one year ago.

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The seasonally adjusted Purchase Index increased 5.71 percent from one week earlier, but remains 66 percent below the peak years of 2005.

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The Refinance Index increased 4 percent from the previous week. Things have not been the same since the mortgage rate surge in May 2013.

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“There was a broad based increase in mortgage applications last week relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.89 percent from 3.90 percent, with points decreasing to 0.36 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

So, despite Magic Janet and The Federal Reserve, mortgage purchase applications remain stalled.

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The Keep: All Households Created During “Recovery” Were Renters

There was a movie from 1983 called “The Keep” with Scott Glenn, Gabriel Byrne, Jürgen Prochnow and Ian McKellen. A great cast, to be sure, but the nemesis in the movie was … a man in a rubber suit.

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The title “The Keep” is more appropriate for the NON recovery of the US economy and housing in particular. That is, did The Fed’s monetary policy help KEEP households in rentership mode? (And its another name for The Federal Reserve building on Constitution Avenue in Washington DC).

If we look at households created during “the recovery” and all The Fed’s monetary stimulus, all households created were renters.

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This is not all that surprising since home price growth is 13.3X wage growth.

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But the US is not alone in poor wage growth. Europe, UK, Japan and the US are all suffering stagnant wage growth. While house prices are booming in many countries.

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The US homeownership rate keeps falling despite The Fed’s massive intervention.

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Any wonder why the M1 Money Multiplier and M2 Money Velocity are so low?

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Like in the movie “The Keep” you will have to rent.

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