The Wall Street Examiner » Must Read Get the facts. Fri, 31 Oct 2014 14:58:14 +0000 en-US hourly 1 Why that Economy of Ours Feels so Crummy Fri, 31 Oct 2014 07:13:22 +0000 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

That the economy grew at a “faster than expected” annual rate of 3.5% in the third quarter has been touted as a sign that now – finally, after years of false promises – it is reaching that ever elusive “escape velocity.” But instantly, people with keen eyes began to quibble with it.

One big factor was military spending, which spiked 16%, the fasted since Q2 2009. This rate is based on the increase from the second quarter that is then annualized, assuming that spending wound continue at this rate for a year. This type of quarter-to-quarter annualized rate is volatile. For example, it plunged 20% in Q4 2012, jumped 17% in Q2 2009, and 18% in Q3 2008. Spikes and plunges often run in sequence (chart).

In reality…. According to data from the US Treasury, the Department of Defense spent $149 billion in Q3, which was actually down a smidgen from the $150 billion it spent in Q3 2013. This lets out a lot of hot air. That spike was likely a fluke, much like other spikes and plunges before it, and much of it may well be undone in Q4.

The other two big factors in that “faster than expected” growth of GDP were inventories, which ballooned and will eventually have to be whittled back down, and exports.

The surges in these three categories caused JPMorgan to cut its Q4 GDP growth forecast to 2.5% from 3.0%. “All three of these categories tend to be associated with payback the following quarter,” explained chief US economist Michael Feroli. And the crux of the economy, the consumer? “Still plodding along in a steady, but unspectacular, manner….”

Whether or not that annualized quarterly rate of 3.5% was a mirage – year over year, the economy grew by just 2.3%.

A growth rate barely above 2% is exactly where the US economy has been for the last five years! Nothing has changed. For a recovery by US standards, it’s a very crummy growth rate, and far from the escape velocity that Wall Street hype artists have predicted for years in their justification for the ceaselessly skyrocketing stock market.

But it gets worse. The population in the US has been growing too. And the economic pie has to be divvied up among more people. So the pie has to grow faster than the population or else, on an individual basis, that growing overall economy, gets cut into smaller slices of the pie.

GDP adjusted for inflation as well as population growth produces real per-capita GDP. It is the sort of economic growth that people actually experience. Doug Short atAdvisor Perspectives has been tracking this measure for years (here is his update and methodology). And it paints a gloomier picture.

Before the financial crisis, real per-capita GDP peaked in Q4 2007. Then it fell 5.5% to bottom out in Q2 2009. Since then, it has been working its way back up. In 2013, it surpassed its pre-crisis peak. Now, it is up a measly 2.3% from where it was nearlyseven years ago! And it remains far below the long-term trend (red line):


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How Long Can the Top 10% Households Prop Up the "Recovery"? Fri, 31 Oct 2014 02:15:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

The question of “recovery” really boils down to this: how much longer can the top 10% prop up the expansion?

A flurry of recent media stories have addressed housing unaffordability, for example Why Middle-Class Americans Can’t Afford to Live in Liberal Cities.

The topic of housing unaffordability crosses party lines: Housing Ownership Back to 1995 Levels (U.S. Census Bureau).

Other stories reflect an enduring interest in the questions, what is a living wage?and what is a middle-class income? These questions express the anxiety that naturally arises from the sense that we’re sliding downhill in terms of our purchasing power–a reality that is confirmed by this chart:

Here’s a recent story that delves into the question of “getting by” versus “middle class”: How Much Money Does the Middle Class Need to Get By?

“Just getting by” in costly coastal cities requires an income in the top 20%: around $60,000 for individuals and $100,000 for households.

The article references MIT’s Living Wage Calculator, which I found to be unrealistic in terms of the high-cost cities I know well (Honolulu and the San Francisco Bay Area). It appears the calculator data does not represent actual rents or food prices; the general estimates it uses woefully under-represent on-the-ground reality.

Current market rents in the S.F. Bay Area far exceed the estimated housing costs in this calculator, and that one line item pushes the living wage from $36,000 for two adults closer to $45,000 in my estimate–roughly the average wage in the U.S. (not the median wage, which is $28,000).

If you want to know where you stand income-wise, here is a handy calculator: What Is Your U.S. Income Percentile Ranking?

Here are the data sources:

Wage Statistics for 2013 (Social Security Administration)

2013 Household Income Data Tables (U.S. Census Bureau)

There are many complexities in these questions. For example, Social Security data does not include food stamps, housing and healthcare subsidies provided by the government, etc., so lower-income households’ real (equivalent) income is much higher than the published data.

Then there are the regional differences, which are considerable; $50,000 in a Left or Right Coast city is “just getting by” but it buys much more in other less pricey regions.

As for what household income qualifies as “middle class”–it depends on your definition of middle class. In my view, the definition has been watered down to the point that “middle class” today is actually working class, if we list attributes of the “middle class” that were taken for granted in the postwar era of widespread prosperity circa the 1960s.

In What Does It Take To Be Middle Class? (December 5, 2013), I listed 10 basic “threshold” attributes and two higher qualifications for membership in the middle class. Please have a look if you’re interested.

I came up with an annual income of $106,000 for two self-employed wage earners and the mid-$90,000 range for two employed wage earners, the difference being the self-employed couple have to pay 100% of their healthcare insurance, as there is no employer to cover that staggering expense.

$90,000 puts a household in the top 25%, and $101,000 places the household in the top 20%. $150,000 a year qualifies as a top 10% household income.

If we set aside income and consider net worth, net worth (i.e. ownership of assets and wealth) of most households is modest:

This shows the decline in household wealth since 2003:

Can an economy in which the majority of households are “just getting by” experience robust growth, i.e. “recovery”? If we discount the millions of households who are paying for today’s consumption with tomorrow’s earnings, i.e. credit cards, auto loans, student loans, etc., I think it’s self-evident that only the top 20% (and perhaps really only the top 10%) have the income and net worth to expand a $16 trillion economy.

By definition, the top 10% cannot be “middle class.” Yet it seems that these top 12 million households are propping up the “recovery”–dining out at pricey bistros, paying $200 a night for hotels, buying homes that cost $500,000 and up, paying slip fees for their boats, funding their children’s college education with cash rather than loans, etc.

The question of “recovery” really boils down to this: how much longer can the increasing debt of the bottom 90% and the wealth of the top 10% prop up the expansion?


Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

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World Stock Markets Trading Discussion – Dispelled doubts Fri, 31 Oct 2014 02:07:58 +0000 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers forging ahead: Kiwis and Aussies +0.6%, Nikkei +1.7% and Sth Korea +0.2%.

In Aussie sectors, Gold doing it tough, -3.2% with REITS +1% the biggest gainer.







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Lower crude oil price in the US does not imply oversupply Thu, 30 Oct 2014 20:29:00 +0000 This is a syndicated repost courtesy of Sober Look. To view original, click here.

Social media has been circulating this chart on US crude oil, that seems to indicate that the US is sitting on excessive inventories. That’s simply not true. In fact US crude oil availability in storage, as measured in days of supply, is tighter than it was last year.

Source: EIA

The same holds true for gasoline.

Source: EIA

Furthermore, the WTI futures curve is in backwardation, indicating that the demand for physical crude in the US remains robust (this is not the case for Brent).


Sharply lower crude oil prices is a global phenomenon and is by no means an indication of slack demand or excessive inventories in the US.


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Better Trade Flows – But Not Better Trade Policies – Lead Solid 3Q U.S. Growth Thu, 30 Oct 2014 15:04:54 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Today’s initial third quarter GDP figures show that the solid growth performance was powered largely by a major drop in the inflation-adjusted U.S. trade deficit to its lowest quarterly level since the start of 2010.  In the process, they revealed how reducing the U.S. trade deficit can speed up the American economic recovery without relying on debt creation.

Yet this improvement – the biggest since the recovery began – stemmed from the turnaround in American energy trade, not flows heavily influenced by trade deals and other U.S. trade policies. Trade, moreover, remains a drag on U.S. growth, and despite hitting a new quarterly record, American exports remain woefully short of achieving President Obama’s doubling goal.  Here are the highlights: 

>The Commerce Department’s first look at third quarter GDP growth revealed that a smaller trade shortfall was the biggest single contributor to the quarter’s solid 3.50 percent inflation-adjusted annualized growth.

>Trade contributed 1.32 percentage points to this annualized growth figure – greater than personal consumption (1.22 percentage points) or government spending and investment (0.83 percentage points). In the second quarter, trade subtracted 0.34 percentage points from the final 4.60 percent growth figure.

>As in every period during which trade adds to real growth, it achieves this goal without a single dollar of new budget deficit-boosting tax cuts or spending hikes. Indeed, since nearly all of this debt-free growth comes from the private sector, trade-generated growth strengthens American finances by increasing the nation’s level of taxable activity and thus reducing the national debt.

>The real third quarter annualized trade deficit of $409.9 billion was the nation’s lowest since the $408.8 billion level in the first quarter of 2010.

>The deficit’s $50.5 billion drop from its $460.4 billion annualized level in the second quarter was its biggest sequential decrease since the $85 billion decline in the second quarter of 2009 – when the current economic recovery technically began.

>These better U.S. trade flows, however, are completely unrelated to American trade deals and other trade policies. Instead, they stem entirely from the turnaround in U.S. energy trade.

>According to the U.S. Census Bureau’s separate monthly trade figures, from the recovery’s beginning in mid-2009 through this past July, the real U.S. oil trade deficit is down by more than 50 percent on a monthly basis – from $16.62 billion to $7.67 billion.

>Yet during this period, the non-oil goods deficit – which is heavily influenced by U.S. trade policy – has more than doubled on a monthly basis, from $20.05 billion to $46.62 billion. That’s only slightly below the all-time high of $49.09 billion in May. (The September monthly trade figures will be released on November 4.)

>As a result, even including the effects of the energy revolution, U.S. trade flows have subtracted 2.49 percent from real U.S. Growth since the recovery’s onset.

>U.S. inflation-adjusted exports in the third quarter hit a new record – $2.1203 trillion on an annualized basis. This level is 1.90 percent higher than that for the second quarter.

>U.S. real exports nonetheless are up only 38.10 percent since the first quarter of 2009. As a result, they remain way short of President Obama’s commitment to double them by the end of 2014 – with only one data quarter left to achieve this goal.

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Why We’re Poorer: Inflation and Deflation Are Now Globalized Thu, 30 Oct 2014 14:23:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

We’re being hit with a double-whammy: Wages are under deflationary pressure, and almost everything else is exposed to inflationary pressure.

As correspondent Mark G. observed in Globalization = Permanent Instability, it’s impossible to understand inflation and deflation now except in a global context.
Now that prices for commodities such as oil and grain are set on the global market, local surpluses don’t push prices down. If North America has record harvests of grain, on a national basis we’d expect prices to fall as local supply exceeds local demand.

But since grain is tradable, i.e. it can be shipped to other markets where demand and thus prices are much higher, the price in North America reflects supply and demand everywhere on the planet, not just in North America.

If we put ourselves in the shoes of a farmer or grain wholesaler, this is a boon: why sell your product for 1X locally, when it fetches 2X in other countries? You’d be crazy not to put it on a boat and get double the price elsewhere.

As the share of the economy exposed to digitization increases, so does the share of work that can be done anywhere on the planet. When work is digitized, it is effectively commoditized, meaning that it no longer matters who performs the work or where they live.

If people in countries with low wages can perform the work, why on Earth would you pay double to have high-wage people do the work? It makes no sense. Taking advantage of the differences in local pay scales is called labor arbitrage, as the employer is trading on (i.e. arbitraging) two sets of prices.

It’s not just labor that can be arbitraged: currency, interest rates, risk, environmental regulations, commodities–huge swaths of the global economy can be arbitraged.

The basic idea of the global carry trade is to borrow money cheaply in a currency that’s weakening and use the money to buy low-risk, high-yield assets in currencies that are gaining in relative value.
It’s a slam dunk arbitrage: not only does the trader earn an essentially free return (borrowing yen at 1%, for example, converting the yen to dollars and buying Treasury bonds paying 3%), but there is a bonus yield on the dollar strengthening against the yen: a two-fer return.

Global labor is in over-supply–one reason why wages in the U.S. have been declining in real terms, i.e. when inflation is factored in. The better description is purchasing power: how much can your paycheck buy?

Here is a chart reflecting the decline in purchasing power of U.S. earnings since 2006:

Courtesy of David Stockman, here is a chart of inflation (i.e. loss of purchasing power) since 2000:

Whatever isn’t tradable can skyrocket in cost because, well, it can–since there’s little competition in healthcare and school districts, both of which operate as quasi-monopolies, school administrators can skim $600,000 a year: Fired school leaders get big payouts:

A former Union City, CA superintendent took home more than $600,000 last year, making her the top earner on a new online database tracking salary and benefit information for California public school employees.

Since healthcare is only tradable at the margins, for example, medical tourism, where Americans travel abroad to take advantage of treatments that are 20% the cost of the same care in the U.S., healthcare costs can rise 500% when measured as a percentage of wages devoted to healthcare:

Note that this doesn’t mean that healthcare costs rose along with wages–it means a larger share of our earnings is going to healthcare than ever before. Other than a brief period in the 1990s when productivity gains drove wages higher, healthcare costs have risen faster than earnings every decade. The consequence is simple: the more of our earnings that go to healthcare, the less there is for savings, investments and other spending.

In a way, we’re being hit with a double-whammy: whatever can’t be traded, such as the local school district and hospital, can charge outrageous fees and pay insiders outrageous sums for gross incompetence, while whatever can be traded can go up in price based on demand and currency fluctuations elsewhere.

Meanwhile, as labor is in over-supply virtually everywhere, wages are declining when measured in purchasing power. Wages are under deflationary pressure, and almost everything else is exposed to inflationary pressure. No wonder we feel poorer: most of are poorer.

Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

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Understanding Gold’s Massive Impact on Fed Maneuvering Thu, 30 Oct 2014 09:00:25 +0000 Just about everyone knows Alan Greenspan. As central bankers go, he may just be the most famous ever. Even today, 1 in 6 Americans still think he's the current chair of the Federal Reserve. As Fed chief from 1987 until 2006, Greenspan oversaw the latter part of the greatest stock bull in history. For that, some […]

This is a syndicated repost courtesy of Money Morning. To view original, click here.

Just about everyone knows Alan Greenspan. As central bankers go, he may just be the most famous ever. Even today, 1 in 6 Americans still think he’s the current chair of the Federal Reserve.

As Fed chief from 1987 until 2006, Greenspan oversaw the latter part of the greatest stock bull in history.

For that, some called him “The Maestro.”

From other quarters, the names are far less flattering. Many blame him for inflating massive stock and real estate bubbles, resulting in financial devastation across the economy.

Well, these days Greenspan is acting rather schizophrenic. In fact, you won’t believe what he’s saying now, unless you understand where he’s coming from.

Given the havoc its wreaking on market stability (while ostensibly doing the opposite), it’s absolutely critical to look back at Greenspan’s handiwork to try to make sense of today’s Federal Reserve maneuvering…

Greenspan Was Molded Decades Before Heading the Fed

Greenspan has been an economic adviser to two presidents and a director at several corporations, including JP Morgan & Co., as well as a director of the Council on Foreign Relations.

But his ideas about economics and money change dramatically depending on when you ask him, or where he works.

Back in the early 1950s Greenspan became a member of Ayn Rand’s inner circle.  His essay “Gold and Economic Freedom” was published in Rand’s newsletter The Objectivist in 1966 and in her book, Capitalism: The Unknown Ideal in 1967.  He even read Atlas Shruggedwhile it was being written.

In case you’re confused, yes… it’s the same Alan Greenspan.

In the “Gold and Economic Freedom” essay, he wrote: “… gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.”

He went on to say: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Does this sound like a guy who would be in charge of the world’s most powerful central bank?

Remember, the raison d’être of central banks, and of course central bankers, is to promote and defend a system of fiat money creation and debt. Gold is neither of those. Actually it’s the complete opposite. It’s the anti-fiat money and anti-credit.

It’s not perfect, but it’s still the best money that fiat money can buy.

Greenspan knows it.  He’s always known it.

Now, no longer obliged to toe the Fed’s line, he’s again free to say what he really thinks.

Which has him back to extolling the virtues of gold, a topic he was outspoken on beforeselling out to the dark side of central banking…

Recycling a Tired Stance

“The Maestro” recently shared his thoughts through an op-ed piece in Foreign Affairsmagazine, published by the Council on Foreign Relations.

That’s the same publication that brought us the “brilliant” article we recently discussed inMoney Morning, suggesting the Fed should print and give cash directly to citizens.

In Greenspan’s piece, “Golden Rule: Why Beijing Is Buying,” he suggests:

If China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system. It would be a gamble, of course, for China to use part of its reserves to buy enough gold bullion to displace the United States from its position as the world’s largest holder of monetary gold. (As of spring 2014, U.S. holdings amounted to $328 billion.) But the penalty for being wrong, in terms of lost interest and the cost of storage, would be modest.

Greenspan is even on the pro-gold standard bandwagon:

The broader issue – a return to the gold standard in any form – is nowhere on anybody’s horizon… For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation…  If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute.

Here’s a guy who’s as connected as one gets in the realm of central banking, and yet he’s extolling the virtues of gold as money, suggesting a return to a gold standard. Heck, he even thinks China ought to beef up its gold reserves, enough to overtake the U.S. as the largest owner of gold.

Why? Because he realizes that’s what it would take to partially back China’s currency, the renminbi, with gold, or at least challenge the dollar’s status as world reserve currency.  He also appreciates that it’s a strategy that would be impossible to implement without sufficient gold.

In fairness, as Fed chief, Greenspan did display some affinity towards the precious metal.

In fact, he even followed his own system of a “virtual gold standard” for years, a principle he eventually abandoned the moment it became inconvenient…

The “Virtual Gold Standard” Was Quietly Cultivated

Greenspan recounts how, back in the 1990s at a G-10 governors’ meeting, the discussion was all about the European counterparts itching to sell off their gold.

They knew their simultaneous dumping risked depressing the gold price. So they set up the first Central Bank Gold Agreement in 1999, whereby 15 European central banks agreed to limit sales to 400 metric tons annually over the next 5 years. Curiously, Greenspan points out that Washington abstained.

Clearly he was the savviest of the bunch, knowing that gold is the ultimate form of payment, something a central bank should never sell unless it’s absolutely necessary.

Understanding the positive effects of gold as money, Greenspan devised his own method to reap the benefits.

While heading the Federal Reserve, Greenspan appears to have imposed a “virtual gold standard,” at least according to Donald Luskin of Trend Macrolytics.

goldGold, it seemed, acted as the barometer.  As its rising price signaled inflation, Greenspan would raise the funds rate. As gold’s price fell, he would inject liquidity by lowering the funds rate.

But in 1997, that relationship was severed.

The Maestro dropped his “virtual gold standard,” and raised rates as gold prices fell, and vice versa.

That fueled the blow-off phase of the dot-com bubble and its inevitable crash. Greenspan then drastically cut rates again, inflating the housing bubble.

By 2006 Greenspan had exited, leaving the reins to Bernanke. The housing bubble soon popped, and we all know how that ended. On Ben’s watch, the funds rate was slashed and has flat-lined near zero for the past five years running.

Smell any bubbles? Poor Janet.

Back to Alan…

Let’s follow the Maestro’s original advice. The fact remains that Greenspan knows sound money, and he recognizes the deleterious side effects of fiat money.

In testimony before the U.S. Banking Committee in 1999, Greenspan said, “Gold still represents the ultimate form of payment in the world.” Later, when Maryland Senator Sarbanes asked him if he endorsed a return to the gold standard he replied: “I’ve been recommending that for years, there is nothing new about that.”

Yet it’s intriguing that for all the ambiguous talk Greenspan spewed out during his tenure, his thoughts on gold seem to be clear as crystal.

Greenspan summed it up best when addressing the Council on Foreign Relations back in 2010: “Fiat money has no place to go but gold… It signals problems with respect to currency markets. Central banks should pay attention to it.”

Indeed they should. Indeed we all should. If you’re ever going to follow any the Maestro’s advice, follow that bit and ignore the rest.

It’s just Fedspeak.

The post Understanding Gold’s Massive Impact on Fed Maneuvering appeared first on Money Morning 

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The Wrath of Draghi: First German Bank Hits Savers with Negative Interest Rate Thu, 30 Oct 2014 07:11:20 +0000 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

Deutsche Skatbank, a division of VR-Bank Altenburger Land, which was founded in 1859, is not the biggest bank in Germany, but it’s the first bank to confirm what German savers have been dreading for a while: the wrath of Draghi.

Retail and business customers with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%. In less euphemistic terms, they have to pay0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.

Inflation has had a similar effect in the zero-interest-rate environment that the ECB and other central banks have inflicted on savers, but this time it’s official, it’s open, it can’t be hidden. Instead of lending your moolah to the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you’re financially better off hiding it in the basement. Grudging respect is due the ECB and other central banks: through the perverse regime of ZIRP, they have succeeded in transmogrifying “cash in bank” from an income-producing asset to a costly liability.

“Punishment Interest” is what Germans lovingly call this. It’s the latest and most blatant step of the central-bank strategy to confiscate in bits and pieces and over time the wealth that prudent people and businesses have accumulated, and that should have re-entered the economy via the intermediation of the banks.

Last summer, the ECB imposed negative deposit rates on member banks. At first, it was 0.1%, which has now doubled to 0.2%. The reason? The ECB dragged out its “mandate,” which is, as it said, “to ensure” that “price stability” is “below but close to 2% inflation,” which in turn is “a necessary condition for sustainable growth in the euro area.” Whatever. There is not a scintilla of evidence that inflation is required for economic growth; however, there is plenty of evidence that economic growth can stir up inflation. The good folks at the ECB know this. It’s just the official pretext for using inflation to eat up debt – along with savers.

“There will be no direct impact on your savings,” the ECB announced five months ago. “Only banks that deposit money in certain accounts at the ECB have to pay.” But it added ominously, “Commercial banks may of course choose to lower interest rates for savers.”

And that would be good for savers:

The ECB’s interest rate decisions will in fact benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.

Thank you hallelujah, ECB, for helping out the savers!

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World Stock Markets Trading Discussion – Celestial creep Thu, 30 Oct 2014 01:29:25 +0000 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers mostly rising: Kiwis +0.4%, Aussies +0.5%, Nikkei +0.6% and Sth Korea -0.5%.

In Aussie sectors, Consumer Staples +1.1% down to Gold -2.2%.







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Mortgage Purchase Applications Near 21st Century Lows As Q.E. Ends Wed, 29 Oct 2014 14:06:20 +0000 This is a syndicated repost courtesy of Logan Mohtashami. To view original, click here.

Let be honest here.

Why are mortgage purchase applications near 21st century lows with rates near 4% and homeownership rates at a 19 year low, a number which is artificially high because it includes  delinquent homeowners? There are still 3 million loans in delinquency which means we will have a lot more future renters coming on-line.

A overview of these metrics for the past 20 years illustrates the real story for housing:

– Real Median Income

– Employment to Population Ratio

– Average Wage Growth Year over Year

– Mortgage Purchase Applications

– U.S. Homeownership Rates

From Professor Anthony Sanders


This economic cycle has seen great demand from cash buyers, renters and rental

construction. However, mortgage demand from main street has been sleepy.


We have lower rates in 2014, higher inventory and rising rents and still demand shows no growth.

Still think lending is too tight?  Advocates of the “tight lending’ theory lack a financial lending background. We can clearly see that main street America needs to make more money to have the capacity to own the debt of a home. We don’t need to ease lending standards, Americans need a raise.

As QE is over today we can  also take joy that those crazy home loans are deep in the economic grave as well.  That’s a good thing.  Residential lending is based on debt-to-income ratios and availability of liquid assets — which means now people have to make money in order to get a loan! Disability payouts and food stamp are on the rise in this country and we are looking for a housing recovery from main street? Tsk Tsk.

The “saving grace” for housing in this cycle  is that we have  the rich, both foreign and domestic, buying homes with cash.  If  the rich weren’t buy homes with cash at 20% above historical norms, then sales would be down -13% to -17% year over year.

When asked to give an opinion as to why Warren Buffet is terribly confused by the low housing demand when rates are so low; my answer:  It’s not rocket science, it’s simply math.

My Q&A with

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