Category: Economy

Home sales of newly built homes took a hit in May.

Sales of newly built homes fell 7.8% month-to-month and were 3.7% lower compared with May 2018.
The available supply of newly built homes rose to 6.5 months compared to the existing supply of homes which stands at 4.4 months.
The supply of existing homes in Las Vegas was up an unbelievable 85% annually. I consult with a few Las Vegas realtors from time to time and they have told me the housing market has slowed considerably. Putting things into perspective though, the Las Vegas market is up big from just 3 years ago. Seattle supply of existing homes is up 52% annually and parts of California are in the double digits.
I don’t make to much from one month of data. The trend is what counts to me so I will be seeing how all these data points unfold over the next few months.

Lend someone money. They give you back less than the principle.

29% of government debt has a negative yield.

When the music stops on this, I suspect we will see there are a lot more players than chairs.

The middle part of the yield curve has inverted. Over the past few weeks, the 3 month/10 year has inverted.

This has sparked a recession fear in the US. Typically, the yield curve inversion precedes a recession by months and sometimes years. As of right now, there is nothing to indicate a recession in the near future. However, if the yield curve keeps inverting and stays inverted, stress will build and a recession will occur. I still believe the US market can rally further in 2019.
I am building a sizable cash position for the future. When the recession occurs, the Federal Reserve will expand the monetary base. This has been their modus operandi. Stocks, commodities and real estate will benefit.

Germany’s 10 year government bonds have a negative yield.

Someone will look back at this point in history and write with astonishment the madness of the government bond markets. Why would anyone lend the Germany government money for 10 years and get back less than the principle? This is happening in major European countries.
File under: Things that can not last eventually end.

China is the worlds largest oil importer. So far in 2019, it imported the equivalent of about 10 million bpd.

China imports are up about 50% over the past four years. The year over year growth of oil imports is astonishing.
I have no doubt that China oil consumption will pass the United States at some point in the future. When oil enters the $40-$50 range, it is a screaming buy. China has put a floor on the price of oil.
The beauty of being a crude oil bull is the market is in backwardation.

You can buy a futures contract out a year for less than spot price.

The movements in stock markets around the world to President Trumps tweets on the trade war and potential tariffs are the algo’s gone mad.
Trumps tariffs are tiny. They only effect a small slice of the US imports. Below are the exports broken down by region from the USA and China.

This is much to do about nothing. A deal will be made between the Chinese and the US politicians. Corrections are possible at any time. However, I still believe the dips should be bought.

Earning seasons is upon us. They continue to beat expectations. I think this will continue for 2019.

Emerging markets have been neglected for years. They are about to play catch up.

The Fed is giving hints that it is just about done tightening. These signals have not yet translated into action. The balance sheet keeps shrinking.

I think the fear that central bankers would keep tightening has been misplaced. However, until their words translate into action, I remain cautious.
As a side note about the Feds operation, I noticed that the federal funds rate went above the IOER (Interest on Excess Reserves).

This is not supposed to happen and may indicate banks are going into the federal funds market to maintain their reserve requirements. This article gives a detailed analysis.
Bank of America’s Mark Cabana indicates this is due to money market fund outflows around the April tax date and elevated general collateral repo rates.
Barclay’s Joseph Abate said, “[this] suggests that moments of upward pressure on the rate will become more frequent as bank reserves drop, and changes in the level of reserves now have larger effects on the Fed’s policy target.”
I am not reading to much into this yet. The spread would have to be a lot larger and last a lot longer.

Here is the one paragraph history lesson on IOER. It was created during the last recession. The Federal Reserves states it is ‘an additional policy tool for the Fed’.

Excess reserves are monies that are not in the system so to speak. This money is not bidding up goods and services in the economy. Most of the money the Federal Reserve created in 2008 winded up parked right back at the Fed. In order to have some control over the outflows of this money into the economy, the Federal Reserve created IOER. The FOMC is very much aware of all of this. They make statements about it on a regular basis.
The massive drop in excess reserves over the past few years has not reflected anything strange or abnormal in the money supply numbers or credit. This is not what I would have expected. With the Federal Reserve running off its balance sheet and excess reserves leaking out, it is very difficult to predict how this will all play out. As of right now, there is nothing I see that suggest a recession is on the horizon.

One of my favorite quotes about statistics is the following:
“There are three kinds of lies: lies, damned lies, and statistics”.
Here is the problem with people who crunch numbers all day. They sit in their dark rooms manipulating data with excel spreadsheets. They attempt to “normalize” and “seasonally adjust” all of the data. However, every once in a while, it pays to look at the world around you. I will ask rhetorical questions: Do you believe you are worse off then your fathers generation? What about your grandfather? Great grandfather? I don’t think any one who reflects on these questions can remain long in doubt.
It is very difficult to normalize past income to present income. Benefits, time off, inflation, type of jobs, changing regulatory environment and many other factors need to be considered. Here is what I know. The amount of time working to get household items is decreasing.

The decrease is extraordinary. Not surprisingly, areas that show increases have heavy government interference. Whenever the government subsidizes something, it creates more of a demand for it. The government inflates specific sectors of the economy. For instance, the government guarantees student loans at low interest rates and makes it impossible to discharge this debt. What did you think was going to happen? You will find more willing lenders and more willing borrowers.
Living conditions are getting better. We are moving into bigger and bigger homes.

Life expectancy has been rising in nearly all countries.

There are easier and better methods to determining the increase or decrease in the standard of living. Looking at “real income” in a vacuum is utter nonsense.