Alan's Alert 7-30-2021

 

For the fourth month in a row the Federal Reserve’s favorite inflation indicator has been on the rise.  The Personal Consumption Expenditures excluding food and energy (Core PCE index) has risen to 3.5% year-over-year.  Amazingly, the Core PCE came in below the consensus estimate of 3.7%. 

 

On a monthly basis, the increase was 0.4% for the month of June.  This would translate to 4.8% on an annual basis if the Core PCE index would stay steady for 12 months.

 

You can see that the steepness of the curve has lessened.  I’m sure this will be talked up on the financial media and by members of the Fed.  We are still a long way from determining if the transitory inflation thesis will prove correct but the fact of the matter is, the Fed has gone all in on their transitory thesis. 

 

During this week’s FOMC meeting and press conference, Jerome Powell defined what “substantial further progress” meant.  Chairman Powell had been using the phrase over the course of the government shutdowns.  He had been stating that the Fed was administering an accommodative policy to aid in the economic recovery.  Now that the National Bureau of Economic Research has declared the recession over, the Fed has been dragging their feet in ending the purchases of treasury bonds, mortgage-backed securities, and raising the Fed funds rate.  To be able to drag his feet further, Powell came up with the phrase “substantial further progress” without defining what that meant.  This week he defined the term as being synonymous with maximum employment.  This has allowed Powell and company to continue to kick the can down the road.

 

Also, during this most recent FOMC meeting, Powell had admitted that progress had been made towards their goals.  This would seem to mean that we are getting closer to the moment the Fed will begin to taper their balance sheet expansion.  Bank of America ran a report looking at changes in option premiums and it came to the conclusion that the market believes the taper announcement will happen at Jackson Hole.  This is where the next Fed meeting will take place, which will be August 26^th -28^th. 

To me, this seems too early for the Fed to make that kind of announcement.  We will still have states paying pandemic related unemployment assistance until the beginning of September.  Which means the picture on employment won’t start to clear up until the end of September or beginning of October.  In an unfortunate twist, the latest unemployment figures that came out on Thursday showed an increase in the amount of people getting the pandemic assistance!

Initial claims dropped by 24k but continuing claims rose by 7k and over 211k people were put back onto the pandemic assistance doles.  In an effort to keep even more people on the government dole, a judge in Arkansas has ordered the state to resume federal pandemic unemployment benefits.  If the Fed has tied the tapering of asset purchases to the unemployment rate, we have a long way to go before “substantial further progress” will have been made.

 

 

 

Late last night, I got a tip from David at Live Better Now.  He alerted me to a tweet from Jack Posobiec.  Jack is a former military intelligence officer and a senior editor at the news website HumanEvents.com.  Jack is known for having an ear (or two) to the ground in DC.  He’s been accused of having a “mole” in the White House and seems to be in-the-know before the news media.  Last night he posted the following:

Anyone who has followed Poso for any length of time will know, he does not write click-bait styled headlines or tweets to get views.  While it seems like a stretch that another shutdown could happen, the truth is, those in power have enjoyed wielding it against those that aren’t in power.  If we see another lockdown, we could see another crash in the stock market and more “accommodative policies” by the Fed.  The CDC has really talked up the delta variant and has now “leaked” to the Washington Post their latest attempt to stir up fear.  My guess is that this supposed “leak” was an attempt to gauge if another lockdown could take place.  The problem those in power are facing is that Americans have grown Covid lockdown weary.  What happens if the government mandates another lockdown and Americans don’t cower in fear?  The government will look foolish and there is nothing that the narcissists in power hate more than looking ridiculous.  Which brings me to my latest meme!  In an effort to continue the power of memes over the narcissists in power I bring you…  COVID VARIANT BINGO!

 

Now I’ve already taken care of the popular and not-so-popular variants that have been posted to the WHO’s website.  What makes this exciting is that four new variants have been discovered (P.3, P.2, B.1.427 & B.1.429).  Will they get Greek labels?  Only the “scientists” at the WHO know for sure.  Keep me up-to-date with an email if I miss a new variant getting labelled.  I would hate to miss the opportunity to see a COVID VARIANT BINGO achieved.

 

 

One last thing…

Have a safe weekend.  We’ll see you next week!

Alan's Alert 7-29-2021

 

Today is part 2 of our saga, Adventures in Money Printing.  Yesterday I looked at a couple of the big whoppers of the last 20 years in the market.  These were instances where the yield curve had signaled something was wrong.  The money supply then told the tale of the tape when it came to the crash of the stock market.  Today I’m looking at instances where the money supply was weak but the yield curve never went negative and how the market reacted. 

 

Our return to our epic tale, Adventures in Money Printing, starts in 2003.  This was right on the heels of the 2001 recession.  The yield curve was in positive territory and things should have been humming along smoothly. 

The money supply figures coming into 2003 were strong.  The high plateau at the end of 2002 which pushed the market higher in 2003, continued its strength into the middle of the year.  You can see this with the navy-blue line in the chart below.

Something went haywire at week 34.  When we traditionally see a plateau, instead we see a spike higher, then a big drop which bottoms out on week 45.  This runs well below the trend for 7 weeks.  Money supply then made a feeble attempt to push higher to close out the year.  Starting in 2004 (green line), you can see that the money supply had a rough start to the year.  By week 16, the story had changed and it had a strong showing for the rest of 2004.

 

Looking at the S&P500, twelve weeks after the money supply bottomed in 2003, the stock market stalled.

It then proceeded to trade sideways in choppy fashion until the beginning of November.  This is when it started to pick up.

The S&P500 gained over 26% in 2003.  In 2004 it gained 8.6%.  This sounds like a pretty good return despite the choppy start to the year.  In 2005, however, it barely gained 5%.

 

2005 was the light-blue year in the above money supply chart.  You can see from its lackluster activity, that it was not a good year.  The money supply dragged along the bottom at the beginning of the year.  It then had a low peak, followed by another slow-paced effort, eventually bottoming out on week 30. 

 

From this period of 2003-2005, we can draw the conclusion that when there isn’t a signal from the yield curve that trouble lies ahead, it takes several weeks of below trend data to have an effect on the stock market.  However, the effect can play out over a long period of time unless the money supply numbers pick up and run above the trend.

 

 

 

 

 

The next era I want to highlight is the post financial crisis era of 2009-2012.  This was supposed to be the big recovery after the big crash.  However, 2010 and 2011 both struggled to keep steady upward momentum.  Some of this could be tied to investor’s nerves after such a spectacular crash in 07-08.  Another factor in play was how the Fed’s new tools were going to be utilized (QE, operation twist, etc.).

A quick peek at the yield curve showed that banks had the ability to make lots of money.

The market had a different story to tell.

In two instances in 2010 and one in 2011, investors were seeing choppy action.  Do you think this could have been predicted by the money supply figures?

 

At the end of 2009 (light blue with green circle), money supply was exhausted.  It hit the trough at week 25 then hung down there for 16 weeks.  From this lackluster action, we can figure that capital goods markets would see more sellers than buyers.  From the low negative print on week 36, it took 20 weeks before problems started to show in the S&P500.  You can see it as the first dip in the green box at the beginning of the year.  The S&P500 then had a rebound but it would not last.  My second green oval, this time in weeks 4-14 of 2010, came into play.  This time around, it took 12 weeks from when the money supply went negative before the stock market showed serious weakness.

 

I also took a look at 2011.  It had similar choppy action in the market in the 3^rd quarter that year.  The money supply ended 2010 high and then showed softness at the beginning of the year (blue circles), but I think this irregular stock market action is better explained by investor’s worries about the Fed and the Eurozone crisis.  This is why relying on the money supply alone is unwise.  There are always many factors in play at any one moment.  To think that one tool can save your capital is a fool’s errand.

 

 

 

 

Our grand finale in our epic saga of Adventures in Money Printing will conclude with the 2014-2019 era.  Some of you might have been subscribers of Robert Wenzel when he called both the slowdown in the money supply in 2015 and his call in 2018. 

First off, what did the yield curve have to tell us?

From 2013-2019, it looked like the banks would have no trouble borrowing short to lend long and make a tidy profit.

 

At the beginning of 2015, Robert had emphasized how strong the money supply growth was.  By the end of May, he began to warn that the money supply had dipped and was starting a steep decline.  In mid-June, Robert said, “I have pointed out before that there is a tendency for the money growth to decline this time of year for seasonal reason, but whatever the reason, a drop in money supply is a drop.  There is a very strong possibility money growth will rebound later in the year.  However, the decline in money supply growth is so dramatic that I am advising extreme caution with regard to the US stock market.” (Daily Alert 6-26-2015). 

Then on July 17, 2015, Robert recommended risk-oriented traders to go short. “Risk oriented traders should now switch and trade from the short side. However, I caution that the potential for whipsaw action is exists both in the stock market itself and in the trend in money supply growth. For most this is a time to keep high cash levels (50% cash) and remain on the sidelines until a direction is much clearer.” (Daily Alert 7-17-2015).

 

Here’s what the money supply chart looked like:

Robert had it pegged because 4 weeks later, the stock market dropped (blue box).

I included the weakness at the beginning of 2016 in my blue box but in truth, the Chinese market hit a down phase in the business cycle at that time.  This caused a big selloff in the US market because investors panicked.  Robert had called this as a buying opportunity and he was proven correct as the market rallied through 2017 ending with a dramatic spike in January of 2018.

 

By late 2018, a new story was developing.  The stock market suffered ups and downs through the first two quarters.  This is directly attributable to the dismal growth in the money supply at the beginning of the year (orange circle) and the lower peak than previous years.  After the trough, it began it’s plateau in line with prior data.  However, something went wrong.  It began to run below trend.  Robert captured this in his Daily Alert on 9-14-2018 with, “If money supply continues this sluggish, the economy could be in real trouble at some point in 2019.  And the general stock market could start a major break at any time between now and the first half of 2019.”  

Then on October 5^th, Robert’s Alert led with this headline:

He had nailed it again.  Over the next three months, the market searched for support.  It didn’t find it until Christmas Eve, when the plunge protection team was called in to get to work, causing the market to rally through the next quarter.

 

 

 

Reflecting back to our current money supply situation, we are in a different era.  The spectacular increase in the money supply in 2020 and the hot start to the year in 2021 have turned up the heat on the stock market, the housing market, and the bond market.  This has also led to increases in all the inflation indicators such as the CPI, PPI, and PCE.  Once the market gets adjusted to the increase in the supply, it becomes dependent on it to reach new highs.  We have run above trend for a long time.  At some point, we’ll need to come back into the fold or the Fed will risk running much too hot on the inflation front.  

Some disclaimers; I’m not currently predicting a crash.  I’m not trading on the short side.  I am keeping a close eye on the money supply, the yield curve, and margin debt.  These will be signaling, in advance, of a change in the market.  Right now, I’m neutral on the general market and have no positions in the S&P500.  I’m continuing to hold positions that would benefit from price inflation.

Alan's Alert 7-28-2021

 

After yesterday’s money stock report, I thought I should take some time to review previous money stock reports in a hope that it would shed a little light on the current situation.

 

The reason that the money supply report is so important is that it signifies whether money is plentiful or scarce.  When money is plentiful, it is able to bid up the prices of goods in the capital goods sectors.  The most liquid capital goods sector is the stock market, followed closely by the bond market.  Housing is also a capital goods sector but is less susceptible to fluctuations in the money supply reports.  This is due to the fact that when people buy a house, they tend to stay in that house for a long period of time.  Also, when you go to sell a house, it typically takes many weeks.  Once a buyer and seller come together on an agreed upon price, the banks get involved.  Most people require a mortgage; hence a bank has to be brought in on the transaction.  Once the bank gets onboard, a real estate closing can run up to 60 days before it gets finalized.  This makes housing much less liquid.  When people (or corporations, hedge funds, pension funds, etc.) own stock, they can quickly and easily sell it.  Prices can quickly fluctuate to find an equilibrium between buyers and sellers.  This makes owning stock more liquid.  The same goes for the bond market.  Since there is a large pool of buyers and sellers, equilibriums are found quickly.  When money becomes scarce, there are fewer buyers.  When there are more sellers than buyers, the price must come down to find the equilibrium. 

 

This brings me to Alan’s trading rule #1; for every buyer, there must be a seller.  When you are buying a stock, option contract, futures contract, or bond, someone is on the other side of that trade selling it to you.  I think this idea gets forgotten in our world of online brokers and market maker liquidity.  Do you think that person selling you that stock made money before they sold it to you?  Do they expect the price to go down, is that why they sold?  What makes you think that you know more than they do?

 

Our first foray into the adventures of money printing, is a look back to the 07-08 financial crisis.  One of the first clues that signified there would be an issue was that the yield curve had gone negative.

After the yield curve goes negative, banks struggle to make money.  When banks issue loans, they borrow money on a short-term basis and lend it out on a long-term basis.  When the yield curve goes negative, banks lose money on new loans.  Since the US operates on a fractional reserve system, banks only need a fraction of the funds necessary to create new loans.  This means that the banks can loan out money they don’t have.  This expands the money supply.  Once new loans aren’t issued, the banks stop expanding the money supply. 

 

This is what the money supply looked like from 2004-2008.  You can see that there is a seasonality to the flow.  It looks like a series of waves.  It starts high at the beginning of the year, drops slightly, rises, drops further, then rises, plateaus, then rises again to end the year.  2008 is in yellow with the blue boxes.  You can see that year looks quite different than the rest.  It started similarly to other years but then rose much higher.  It peaked at 16% on week 17.  After this high rise, it then plummeted lower than any other year.  My calculation of the money supply actually put it at a negative amount for 5 straight weeks, bottoming at -3% on week 30.

This caused havoc in the S&P500.

I’ve pointed out the specific weeks that were highlighted in the money supply chart with the high (week 17) and lows (week 27 and 30) on the S&P500 chart.

On week 17, the S&P closed at $138.55.

On week 27, the S&P closed at $128.04.

On week 30, the S&P closed at $126.13.

At the beginning of Sept, the S&P closed at $127.99, but then the plunge began. By the beginning of Oct, $115.99 (down 9% month-over-month).  By the beginning of November, $96.83 (down 17% month/month).  By the beginning of Dec, $82.11 (down 15% month/month).

There were many other factors that fueled the 07/08 financial crisis but the money supply data told the tale of the tape for the S&P500.  There was about an eight-week lag between the low of the money supply data and the beginning of the stock market crash.

 

 

 

Our next adventure in money printing takes us back to 2000-2002.  Again, the first clue that something was going wrong was spotted in the yield curve.

The curve had been dragging bottom for a long time, but once it went negative, the stage was set.

 

 

The money supply curve looks similar to the earlier example.  We have a wave to start the year, then a lull, a peak, then a trough, it then climbs to a plateau before it ramps up at the end of the year.  I put a red box around weeks 36-47 in 1999.  This was a lower plateau than previous years.  It also lasted longer.  This was a hint that choppy action for the market was dead ahead.  We then moved into the year 2000.  I’ve used orange arrows to highlight the peak and trough.  The peak in 2000 was achieved on week 18 and was higher than the previous two years.  It then plunged below the trough trendline and went negative by week 27.  Its plateau was similar to the previous year which was not enough to push the market higher.  By 2001 the Fed tried to juice the money supply.  It started off the year hot, rising to a peak on week 16 of 17.5%.  It then dropped off to a low of -1.7% in week 29.  The entire year of 2002 was sluggish.  The money supply was below the trendline by week 11 but the trough was shallow.  It then plateaued higher than 1999 & 2000.  This helped to stabilize the market.

 

Approximately 8 weeks after the red box in 1999, we had choppy action in the stock market.  There was a push to a higher range.  Then, 8-10 weeks after the negative money supply data on week 27 in the year 2000, the crash began.  The market never stabilized until 10 weeks after the money supply's high plateau in 2002.

 

 

While our current situation is similar to both of these instances.  There is one glaring difference.  That is the yield curve signal. 

 

While it did run negative in the summer of 2019, it was not nearly as long or deep as the previous two instances.  Tomorrow I’ll expand our adventures in money printing to look at instances where the yield curve didn’t go negative and we had a slow down in the money supply.  I believe that the current phase of the economy will be more in line with those instances and give us a better look into what we are dealing with.

 

 

 

Alan's Alert 7-27-2021

 

We are looking at a rough road ahead.  The Federal Reserve posted the H.6 Money Stock Measures this morning and it looks downright frightful.

Money supply growth has plummeted.  The last three readings are as follows;

6/21 – 6.36%

6/28 – 3.91%

7/5 – 3.26%

 

We have swiftly gone from a high in the 17-20% range to a low at 3%.  3% might not even be the low!  Typically, the low is around mid-July but we won’t see that data until August 24^th.  These low readings do not bode well for the capital goods sector.  The housing market and the stock market are in for choppy action at best.  I am very tempted to go short here.  In my mind, there is no way that back-to-back weeks of 3% money growth can keep this train on the tracks.  I’m afraid that the stock market will soon be looking for support and at its current dizzying level, support is a long way down.

The S&P/Case-Shiller Home Price Index was also posted today.  The S&P/Case-Shiller Index pushed itself to a new record.  It increased 2.1% over the prior month and 16.6% on a year-over-year comparison.  This is the highest year-over-year climb the index has ever seen.

 

Prior peaks happened in September 2005 at 14.5% and October 2013 at 10.8%.  The increase is housing prices has been dramatic. 

 

I’m a big believer in Robert Shiller’s theory on home prices and how they track inflation.  He spelled this out really well in his book, “Irrational Exuberance”.  Something to keep in mind while viewing this data, the Case-Shiller Home Price Index is a month behind.  We are looking at data from May when the housing market was really on fire.

 

 

 

Finally, I want to touch on the Conference Board’s Consumer Confidence Index which was posted this morning.  The index, which measures consumers’ assessments of current conditions of business and labor, rose to 129.1.  This is up from 128.9 in June.

This is the fifth consecutive month of gains in the index.  Lynn Franco, the senior director of Economic Indicators at The Conference Board stated,

“Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021.”

More confidence means more willingness of consumers to spend.  This is stated plainly by Franco.  Consumers are still sitting on a large amount of cash when you look at the deposits sitting at commercial banks.  I touched on this briefly in yesterday’s alert.  Bank of America was quick to use the data and run a trend line.  I covered that in a previous alert.  The bank had anticipated that these funds would be spent when a “sunny day” arrived.  It seems consumers are happy with a cushion in their bank account.  That or they are having trouble securing the products they want to buy due to logistical issues related to port slowdowns and train congestion.  To sweeten their bank accounts further, the Biden administration is now sending out advances on the child tax credits on a monthly basis.  We’ll see if consumers get motivated to spend and still feel confident when the next report is released August 31^st.  I have a feeling we’ll be looking at a completely different picture at that point.

 

Alan's Alert 7-26-2021

 

Someone is shining a laser at the housing market.  Recently the price of lumber had skyrocketed and now it has crashed back down.  This caused headaches for builders as many projects had to be re-bid or had escalation clauses inserted to cover lumber market volatility.  Now that the price is quickly plunging to pre-shutdown levels, home sales data has turned weak.  The mad scramble to buy a house is beginning to fade.  Last week I had touched on housing starts and building permits.  Not included in that data was that mortgage applications had declined 4%.  I felt this was a normal reaction after they had surged 16% in the previous week.  This morning the US Census Bureau released their New Home Sales report.  It came in at -6.6%.  This is in stark contrast to the consensus estimate of +3.5%.  

This is the third consecutive decline.  You can see from the chart; it has quickly reverted to the trend-line of the past ten years.  Also, the median sales price has decrease from $374,400 to $361,800.  More houses are starting to hit the market pushing inventories up to 6.3 months’ worth of supply.  This puts it in line with where it was prior to the government shutdowns. 

 

Home prices and sales are an important indicator.  Just like the stock market, the housing market is powerfully impacted by the Fed’s money pump.  These markets require ever increasing amounts of new money to continue to breakout to dizzying new heights.  Tomorrow we’ll get a look at the Fed’s money pump when they release their H.6 money supply data.

 

 

The banking picture continues to look rough.

Lending has run out of steam.  New business loans are not being created. 

 

On the consumer side:

Savings is up and credit card use is down.  When everyone was locked down by the government, did they go on a Dave Ramsey reading spree?  The “financial guru” emphasizes paying off debt and saving 3-6 months’ worth of expenses.  That looks exactly like what is going on here.  If this trend were to reverse, inflation would be roaring into the market.  Currently it is trickling in, here and there.

 

 

This is a big week for market moving events.  The Federal Reserve Open Market Committee (FOMC) meets for 2 days starting tomorrow.  A summary press conference will be given on Wednesday.  Tomorrow, the Fed also releases the money supply data and Friday, their favorite inflation indicator (Personal Consumption Expenditure) is posted.

Important and Potential Market Moving Events This Week

 

Tuesday, July 27
5.30am Durable Goods Orders (June)
6am S&P/Case-Shiller Home Prices (May)
6am House Price Index (May)
7am CB Consumer Confidence (July)
9am H.6 M2 Money Supply
 
Wednesday, July 28
5.30am Wholesale Inventories (June)
11am Fed Interest Rate Decision
11.30am Fed Press Conference
 
Thursday, July 29
5.30am Initial and Continuing Jobless Claims
5.30am GDP (2^nd Quarter)
7am Pending Home Sales (June)
 
Friday, July 30
5.30am Personal Saving Rate (July)
5.30am Personal Consumption Expenditures (July)
 
 

Alan's Alert 7-23-2021

 

The IHS Markit Purchasing Manager's Index (PMI) was posted this morning. The report is considered “soft data” because it is based on reports and interviews. It is also the preliminary report. The final version of the report comes out on August 2^nd for the manufacturing portion and August 4^th for the services and composite final.

The manufacturing side of their report posted another record high of 63.1. This beat expectations of 62.0 and was up from June's 62.1 mark. New orders rose as consumers opened their wallets. Foreign demand was up and production was up despite material shortages. Backlogs increased (second-fastest increase on record) though more job openings are being filled. Finally, the rate of inflation accelerated to a new high in the survey.

On the services side of the survey, the PMI dropped to 59.8 from 64.6 in the previous month's report. This underwhelmed expectations of 64.8. This is the third month in a row of declines in the services PMI and the lowest rate since February (a five-month low). Businesses struggled acquiring labor and shortages of stock. New business in the sector was down. Firms noted an increase in costs which caused some customer hesitancy.

The composite PMI index to fell to a 4-month low of 59.7. This is down from 63.7 in June. Output growth was the slowest in the past four months.  

 How do we balance a slowing of expansion on the services side of the economy with a very robust expansion on the manufacturing side? Something to keep in mind when reviewing “soft data” reports like the ISM or Markit survey is that anything above 50 is expansionary. Meaning even though the services report disappointed expectations, it is still in expansionary mode. Also, manufacturing jobs pay more. Workers are coming back to those jobs over the lower paying service sector jobs. This gives those manufacturers added optimism. Chris Williamson, the chief business economist at IHS Markit wrapped up the report with this quote, “Inflationary pressures and supply constraints – both in terms of labour and materials shortages - nevertheless remain major sources of uncertainty among businesses, as does the delta variant, all of which has pushed business optimism about the year ahead to the lowest seen so far this year. The concern is this drop in confidence could feed through to reduced spending, investment and hiring, adding to the possibility that growth could slow further in coming months.”

He points out that the three primary pressures weighting on businesses are inflation, labor and material shortages, and covid derangement syndrome. I find it curious that he put them in that order. For me, this continues to reinforce the idea that this is not “transitory” inflation.  

Alan's Alert 7-22-2021

 

It’s Thursday, which means employment data was released this morning.  Initial claims came in up 51k to a total of 419k.  Continuing claims came in at 3,236k.  This is down 29k from the prior week.  However, my eyes were fixed on the pandemic relief numbers.

 

Over 1.1M people left the pandemic assistance this past week!  This is great news but we still have a long way to go as over 15M people are still using it.  Here’s what the graph of 1.1M people leaving pandemic assistance looks like:

Now, initial claims came in up but I still believe we are trending in the right direction. 

The financial news media was shocked at the rise in initial claims.  The consensus was going to be an 18k claim drop.  So, when it came in up 51k, it provoked a wild ride in the S&P500 today.    

 

 

And thanks to Goldman Sachs, we have this little graph:

It was, and still is, obvious to those with the most basic level of economic common sense that paying people extra unemployment to stay home will encourage them to…. stay home!  It continues to be a terrible policy to drag these bonus unemployment benefits out to September.  The states that continue to do so are only hurting their own economies and small businesses. 

Joe Biden was at a townhall meeting in Cincinnati last night.  He told the audience that workers are seeking better wages and working conditions, and those businesses desperate for workers should simply offer higher wages.  He called rising wages a “feature” of his economic plan.

What happens when the bonus unemployment runs out?  What happens when these millions of workers flood back into the labor market?  Will Joe’s “feature” of rising wages run out of steam?

I put the question of downward adjustments to wage rates to professor Don Boudreaux, who runs the blog Café Hayek.  Don Boudreaux is a professor of economics at George Mason University.  He writes a great blog that is a must follow.  I asked professor Boudreaux what would happen to wages once these workers came back to the labor market.  Would wages decrease?  His answer was spot on:

“I'm quite sure that, as the supply of low-end labor rises (with the end of the leisure subsidies) (1) workers who continue to be worth their current wages will be paid those wages, (2) many newly hired workers will be paid wages lower than are being offered now, and (3) as always, workers who cannot produce enough hourly output to justify being paid even as little as the minimum wage will remain unemployed.

 

Many workers hired during the labor 'shortage' might well find that they have to take pay cuts as more workers start to compete for jobs. (Most of these pay cuts will come in the form of taking new jobs at lower wages.)”

 

 

Smart low-wage workers should take advantage of this opportunity.  Unfortunately, many find it too easy to do nothing.  Wake me up when September ends.

Alan's Alert 7-21-2021

 

The housing starts and building permits data came out yesterday.  It was a mixed bag.  All housing starts were up 6.3% month-over-month to a seasonally adjusted rate of 1.643 million in June.  Looking at single-family starts, they were up 6.3% to 1.16 million.  The West dominated the stats, up 12.6%, followed by the south at 9.7%.  Both the Midwest (-7.5%), and the Northeast (-9%) dropped.

However, building permits were down 5.1% from the previous month to a rate of 1.598 million.  They missed market expectations of 1.7 million.  This is the third month in a row of declining building permits.  All regions saw decreases.

The cost of materials and the skilled labor squeeze is warping the housing market.  Its consequences are felt in these statistics.  Builders with approved permits are still building, but they are reassessing future projects and not applying for future permits.  Higher costs are getting passed on to buyers but builders must be concerned that a limit will be hit.  Another factor that plays into the building permits is suitable land to build on in desirable areas.  Permitting issues can run into restrictions when they butt up against zoning laws.  These two stats typically run congruent and at some point, they will have to move in unison once more. 

Another factor playing into this dynamic is the active listings and new listings of housing.

 

Both are showing signs of a rebound.  This could be the beginning of the housing market supply, finally catching up with demand and could signal an end to the insane bidding wars for houses. 

 

Locally, I hear many stories of houses going for well over asking.  It is regularly the rule, not the exception.  In fact, I was recently looking at a house that was listed for $350k.  Zillow had their Zestimate for this house at $332k.  The house was listed as a 5 bedroom but the downstairs bedrooms didn’t have egress windows.  This is a big no-no in the industry.  My realtor told me that the selling agent would review all offers with the owner on Wednesday.  The Monday before, I got a call that the owner had already reviewed an offer and accepted it for $390k.  This kind of “soft fraud” is a signal to me that a top in the market is coming.  When the “soft fraud” begins to lead to “hard fraud”, a serious correction similar to 2008 becomes more likely. 

 

 I don’t believe we’ll see a 2008 styled correction in the housing market.  More likely, we’ll see a top, then a period of slight decline or stagnation where a new base forms.  As a reminder, Robert Shiller came to the conclusion in his book, “Irrational Exuberance”, that long term trends in home prices are a direct result of inflation.  I wrote about this back on June 29^th.  Here is the link.  If the perpetual inflation story stays intact, this top in the housing market could be a short breather before housing prices resume their rise.