Housing Market Showing Weakness

We are now nearly eight years into the great experiment.  Following the economic meltdown of 2008, governments worldwide  embarked on the largest economic interventions ever attempted.  While the central banks and politicians promised wonders from these elixirs, the results have been quite different.

Tony Sagami, editor of the Rational Bear at Mauldin Economics recently published an article titled 4 Signs That the Lights May Be About to Go Out in the Housing Market that paints a disturbing picture of one of the more important parts of the US economy, housing.  Sagami shares the following data:

  • Currently the homeownership rate is back down to 1993 levels.
  • The Wall Street Journal reported that pending US home sales dropped by 2.5% in January, as compared to December, and had a rather insignificant gain for the year of less than 1.5%.
  • New home sales for January dropped by over 9%, according to the Investor’s Business Daily.
  • The medium sales price for new homes dropped by 4.5% in January, following drops of 3.7% and .3% respectively in December and November.

A further indictor of the weakness in the housing market is the return of creative mortgage financing, the same type of gimmickry that helped create the original meltdown.  Equifax reports an increase of the mortgages given to people with credit scores of less than 620.  In addition, during the first nine months of 2015, over $50 billion in mortgages were of the sub-prime variety, a substantial growth in this risky lending practice.

The housing figures are troubling on their own.  However, when taken in the context of the massive governmental interventions of the past 8 years, they are more problematic.  These interventions included a massive stimulus program, running up the US debt to over $19 trillion dollars and keeping interest rates near 0% for nearly eight years (and now threatening to go negative).

Housing is not the only major part of the economy showing weakness.  Sagami reports on weakness in manufacturing, corporate earnings, and restaurants.

It is evident to any with the most basic knowledge in economics that the governmental interventions and central banks fiscal policies have utterly failed to stimulate economic growth, as we were promised when implementing these radical programs.  Now the question turns to whether or not these policies actually have led to economies worldwide heading toward recession. But do not expect the governments or central banks to accept responsibility.  In fact they are doubly down on the failed policies by sending interest rates into unchartered territory, negative.  These are challenging times indeed.

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Fed’s Yellen Primes Pump

Federal Reserve Chairperson, Janet Yellen, today announced that Fed will continue its low interest rate policy for some time into the future. Many had expected Yellen to indicate that with the improving economy, the Fed would begin a slow rise in interest rates. Yellen’s commitment of more gin in the punch bowl had an immediate effect with the Dow Jones Industrial Average, S&P 500, and the UK’s flagship FTSE 100 all hitting recordYellen highs.

Generally, rising stock markets are positive signs if the rise is based on appropriate economic fundamentals.   The lengthy drive-up of equity values are instead being driven by the Fed’s low interest rates and Quantitative Easing. This is problematic at various levels. First, should there be an economic slowdown, as there inevitably will, the Fed would have no ammo left to juice up the economy. In addition, when interest rates eventually rise, overvalued equities will show a rapid decline in value causing significant economic pain.

Perhaps the most problematic aspect of the Federal Reserve’s low interest rate policies is who benefits from them. While some on mainstream benefit as equity values rise, especially in 401(k) plans, the greatest benefit goes to the highest income brackets, the people who have the most to invest. This has led to the large increase in the income disparity in the United States. The Fed’s continuation of its policies will further increase the disparity.

Finally, the Fed’s low interest rate policies have cajoled investors into higher risk investments in search of yield. This places further upward pressure on equity values as the bubble builds and guarantees that the next downturn will be exasperated by these interventionist policies.

For many months government publish statistics has shown a significantly improving economy. In addition, by the classical definition, the recession ended years ago. These two items seem in conflict with Janet Yellen’s announcement today that the economy is still fragile. Either the government’s published figures or Yellen’s comments of earlier today relating to the economy need to be questioned.

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