YOY median sale price for housing is up 8.9% compared to last year. The largest increase in 4 years.
The economy is strong. This trend will continue.
Wall street and market analysis are filled with permabears and permabulls. Very few understand cycles.
Category: Economy
Earnings Blow Out
Earning continue to beat estimates. Via market watch:
Goldman Sachs Group Inc. reported higher profit and revenue from a year ago, catching the wave of lower taxes and newly active markets that boosted other big banks’ quarterly earnings.
Revenue at the Wall Street firm rose to $10.04 billion from $8.03 billion a year ago. Goldman’s profit was $2.83 billion, or $6.95 a share, up from the year-ago first quarter when the bank’s traders made bad bets on the dollar and interest rates.
Analysts, on average, were expecting earnings of $2.21 billion, or $5.58 a share, on revenue of $8.74 billion, according to Thomson Reuters.
Earnings will continue to surprise based on strong global growth, strong US growth, and the massive tax cuts to US corporations. Beginning in May, many companies will begin to buyback their stocks. Strong earnings next quarter in addition to stock buybacks will be very positive to stocks.
Earning Season
With earning season starting this week, I expect corporate profits to increase by over 15%. This will drive stock prices higher. The markets reaction to a positive earning season will be instructive. The question really is, how much of this has already been discounted. There is no question in my mind that the Trump tax plan will be beneficial to corporations and this will reflect in earnings.
President Xi Jinping Liberalization
Xi gave a speech and promised to open up China’s market and cut tariffs on car imports. He did not mention Trump’s tariffs. This was used as a catalysis for the market to propel higher. Trumps announcement on tariffs is a political move. I don’t believe there is going to be a serious trade war.
The Fed Outlook
From Powell’s speech today:
Unemployment has fallen from 10 percent at its peak in October 2009 to 4.1 percent, the lowest level in nearly two decades. Seventeen million jobs have been created in this expansion, and the monthly pace of job growth remains more than sufficient to employ new entrants to the labor force. The labor market has been strong, and my colleagues and I on the Federal Open Market Committee (FOMC) expect it to remain strong. Inflation has continued to run below the FOMC’s 2 percent objective but we expect it to move up in coming months and to stabilize around 2 percent over the medium term.
Over the next few years, we will continue to aim for 2 percent inflation and for a sustained economic expansion with a strong labor market. As I mentioned, my FOMC colleagues and I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals. It remains the case that raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion. But raising rates too quickly would increase the risk that inflation would remain persistently below our 2 percent objective. Our path of gradual rate increases is intended to balance these two risks.
Of course, our views about appropriate monetary policy in the months and years ahead will be informed by incoming economic data and the evolving outlook. If the outlook changes, so too will monetary policy. Our overarching objective will remain the same: fostering a strong economy for all Americans–one that provides plentiful jobs and low and stable inflation.
As I have stated, they will be slow to raise rates. They will be data driven. The first sign of trouble they will hit CTRL+P.
Market Update
Volatility is back in 2018. The low volatility in 2017 was abnormal. The markets are back to normal. Economic activity has increased and gained momentum. This will boost earnings in the US and the world. The markets have had a minor correction so far. Amazingly, fear has gripped every investor. The bull market that started almost 10 years ago has had five corrections above 10%. The current one has been about 12%. Each time the correction ended and moved to make new highs. I don’t believe this one will be any different. Until I see signs of a recession, I will not issue any major warning.
Yield Curve and Money Supply
The yield curve is still in positive territory. This is good for the economy and stock prices.
Money supply growth has been falling. It appears to be leveling off. I think it will turn around in the next few months. We shall see.
Components of M1 and M2 growth are shown below. Demand deposits are crashing, but this is usual for this time of year.
John Williams to Head New York Fed
John Williams is your typical Keynesian inflationist. He will be aggressive in his advocacy to print money. He will also be very influential at the Fed.
He will be slow to raise interest rates and “normalize” the balance sheet. Read the full statement here.
Manufacturing Jobs- The Fake Crisis
Manufacturing jobs are decreasing.
I say good riddance.
Politicians and economist say, “We need to bring back manufacturing jobs”.
I ask:
Who is “we”?
Why?
Here is what they never show you.
Manufacturing jobs are disappearing. Productivity is up. This is a good. Robotics and outsourcing has decreased the necessity of men in manufacturing jobs. These people can now do other task in the economy. The USA is second only to China when it comes to manufacturing output in dollar terms. The third, fourth and fifth slot are far behind.
These same people would have been warning about the agricultural jobs disappearing in the 20th century. However, productivity in agricultural is up. US farmers feed the world. Less people are needed to toil in the fields. These people can serve their fellow man in other ways. Instead of picking corn they can become engineers, doctors, barbers etc.
Here is Joan Norberg to set the record straight.
The next time some one tells you about manufacturing jobs, and how the USA does not make anything any more. Tell them what a remarkable success US manufacturing has become. More productivity, less workers. This is called high efficiency.
Weekend Reading
Click here to read this. From the abstract:
Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate.
From the conclusion:
…we ask “What happens next?” What happens if interest rates rise and nonbank revenue drops? What happens if commercial banks or other financial institutions lose their taste for extending credit to nonbanks? What happens if delinquency rates rise and servicers have to advance payments to investors —advances that, in the case of Ginnie Mae pools, the servicer cannot finance, and on which they might take a sizable capital loss?
My answer: Nothing good.