Stocks Soar While Housing Market Stumbles & GDP Turns Negative

Stocks Rise While Housing Market Falls

Pending home sales, home sales and mortgage applications are all down. GDP was negative in the 1st QTR yet the stock market makes new highs, can it last?

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Podcast Summary

0:00-4:58 Intro

Stocks Soar While Housing Market Stumbles and GDP Turns Negative

Something is terrible wrong


According to Fed Chairs Bernanke and Yellen quantitative easing was supposed to boost the stock and real estate markets and produce a “wealth effect”. The real estate market is slowing down with pending home sales, mortgage applications and sales plummeting but the stock market continues to hit new highs. When faced with poor economic data like a negative 1% GDP in the first quarter the media and the Fed put an unbelievable Panglossian spin on it.

Housing Sales, Mortgage Applications & Pending Home Sale Drop

Mortgage Applications are down 10-15% year over year. and Pending home sales are down nearly 10% year over year from April 2013. Housing’s difficulties do not stem from the weather or higher interest rates (they are heading lower), but rather from too high home prices and too broke potential home buyers.

Media Reaction to Housing Slow Down

Reuters: “U.S. pending home sales show signs of “stabilizing”

The Federal Reserve Reaction to the Housing Slow Down

The Fed is conflicted on the direction of the housing market. Most Fed Presidents and Fed Chair Janet Yellen, however, think that the housing market is not doing well, and have brushed aside the slow down, even though housing was supposed to be a major driver of the economy and its “recovery”. The Fed does not expect the housing market to improve much this year, yet they believe that the overall economy will grow rapidly the rest of the year.

Stock Market Reacts to A Negative 1st Quarter GDP

Perversely, the stock market rose on the news of a negative GDP print, not because the Fed might reverse the QE taper but because it believes the economy is improving.

Media Reaction to the Negative First Quarter GDP- Temporary set back!!!

GDP fell at a 1 percent annualized rate, worse than the most pessimistic forecast in a Bloomberg survey of economists, yet the media focused on the positives of the negative report today in Washington.

Bloomberg and Reuters Tout Good News!:

Bloomberg: U.S. Economy Shrinks for First Time Since 2011; Pent Demand Suggests Temporary Setback

“Much of the decline was due to less inventory building that economists say can’t last. As a result, some are boosting second-quarter growth forecasts, with Morgan Stanley projecting a 4.2 percent gain”

Reuters: U.S. Economy Stumbles in First-Quarter, But Prospects Brighter

“The U.S. economy contracted for the first time in three years in the first quarter as it buckled under a severe winter, but there are signs it has rebounded and economists say it could grow as much as 4 percent in the current quarter.”

Durable goods

The durable goods number came in better than expected but the positive print was due to an increase in military spending, without which the durable goods number was negative. That didn’t stop the media from accentuating the positive:

Initial Jobless Claims

Initial jobless claims were lower last week and the media went into full swing declaring that it meant the labor market was improving. As we have noted often, fewer people getting fired does not mean more people will get hired, it merely means there are fewer people left to fire in a shrinking work force.

Yet the media continues to tout a small initial jobless claim as evidence of a strengthening labor market:

Reuters: “U.S. economy contracts in first-quarter, but labor market firming”

Bloomberg: “Fewer Americans than forecast filed applications for unemployment benefits last week, a sign the labor market continues to strengthen.”

Blaming the Weather and Retail Sales

12:05-15:30 Disussion of the poor retail sales results at “middle class” stores like Walmart, Costco, Sears, Staples and Target vs. the record sales at “1%” outlets like Tiffany’s and BMW. Discussion of QE as “trickle down” economics and the incessant use of the word “recovery” to define the economy.

Stock Market Earnings

Discussion of the sales reports of retailers which are down far more than their profits meaning they are not passing along the costs, yet, because if they did sales would go down.

Inflation vs Deflation impact on the Economy

15:30-16:40 Discussion of the negative impact of inflation (higher prices) on sales. Discussion of the impact of deflation (lower prices) on sales (more sales).

Real Estate Social Media Companies


EBEE- Earnings Before Everything Else

Discussion of the social media stocks with no earnings that are soaring and use special accounting to make their “earnings” look better- Earnings Before Everything Else. No where more evident in real estate stocks.

Discussion of the Motely Fool’s characterization of a real estate boom, in which home sales are down and social media real estate companies that make no money are soaring.

One Pillar of the Economic Recovery is Gone- Housing- Is the Stock Market Next?

18:35- the stock market is still rising despite clear evidence of a shrinking economy.

Projecting a Higher GDP Based on a Lower 1st Quarter GDP

19:00 -21:30 GDP is stabilizing!. The Fed and the analysts at the large banks are still predicting better growth ahead 4% in the second quarter, with no indication as to why things will improve still predicting 3% YOY growth.

Russia to Ditch the Dollar, Trade in Rubles

21:30 -24:10 Discussion of the movement away from the dollar.

As a result of sanctions Russian Prime Minister Dmitry Medvedev said “Trading for rubles – this is a definite priority.” “This, in fact, should ultimately move the ruble from the cohort of freely convertible currencies into the ranks of reserve currencies.

U.S. Fines Bank Paribas $10 Billion to Protect the Dollar and Hurt Foreign Banking Competitors To U.S. Banks

Bank Paribas was fined $10 billion as a result of the U.S. Justice Department’s investigation is a criminal probe into allegations that the French bank evaded U.S. sanctions against Iran and other countries for years. The US government also fined Credit Suisse $2.4 billion for helping U.S. citizens evade taxes.

Discussion of such tactics to penalize those not dealing with the dollar will back fire and cause more countries to be wary of using the dollar if it becomes onerous to do so. If fewer countries deal in the dollar, the demand for the dollar will be reduced and the value of the dollar decline, causing price inflation in the United States.

The State of the Economy – Boosted by the Stock Market and Luxury Goods

24:10-26:36 Is the economy leading to a depression held off only by inflating the money supply and a rising stock market? Retail sales are low and the lower retail sales means fewer jobs. The U.S. economy, unfortunately is based on people moving in and out of used houses and buying stuff (70%). The U.S. Commerce Department stated that residential investment has harmed the GDP in the fourth quarter of 2013 and 1st quarter of 2014.

The economy can’t be driven primarily on the spending habits of the rich who don’t spend a great percentage of their incomes and assets-e.g. they dont buy more food than others on a relative basis to what they have, they accumulate assets.

State of the Housing Market- And its Impact on the Economy

26:36-30:00 The housing market is characterized by low sales which are especially low if you take out sales to investors. Existing home sales are low and new home sales are near at historically low levels.

New homes sold since

*the current U.S. population is approximately 317 million. The U.S. population was approximately 226 million in 1980 and 203 million in 1970.

Discussion of why wealthy people don’t hold money in the banking system- no interest and FACTA. They choice to buy hard assets like real estate, fine art instead etc.

The Problem with Economics and Politics

30:00-33:20 Discussion of how politicians use financial crises to get elected and stay in office. How President Reagan made the economy better by making it worse, just like increasing nuclear weapons to reduce them. Discussion how cutting spending would start the process of restructuring the economy and a real recovery. But it wont happen as there would be millions of unemployed government employees and an ensuring severe depression.

33:20-36:40 How far can the media push the economic recovery story and have people believe it? Absent an external event, it seems the Fed can hold it together even though there are diminishing returns from QE which is now nearly five years old.

Bernake quote from sixty minutes acceleration of growth in the second half always predicgted. QE gets bigger and biger with diminishing returns. A reminder that Ben Bernanke initiated QE as a temporary measure in 2009:“money printing is needed because the economy is weak and inflation very low, and that when the economy begins to recovery that will be the time when we can unwind QE and raise interest rates”.

Price Inflation at the Federal Reserve Cafeteria

36:40-40:55 Discussion of article in Zero Hedge regarding price inflation at the Federal Reserve cafeteria.

Does Inflation Mean More Spending/Deflation Less Spending?

Prediction of future staglflation that will entail higher prices, stagnant wages, lower consumption. Inflation does not increase consumption, it decreases it. If prices rise, people will buy less which will not help the economy. Deflation (lower prices) is an incentive to buy. Discussion of the economies of the late 19th century and 1920’s when the economy did well in a deflationary environment.

Printing money does not produce growth as evidence of the .1% GDP growth The weather can not be blamed for weak economic results. Perhaps, natural disasters like Hurricane Sandy disrupt economic activity, but not cold weather as Janet Yellen testified to Congress as a reason for poor economic growth.

Downplaying the Impact of Real Estate on the Economy

40:55-44:00 the Fed is conflicted on the health of the real estate market and downplaying it as a driver of the economy while predicting the second quarter to be better no matter what.

The Positive Impact of Fracking on the Economy

Discussion of the fracking industry gains that are not mentioned by the Fed (because they have nothing to do with it) or the media. Unemployment is the lowest in the states where there is fracking. Credit can’t be given to the government or the Fed for these gain. Government likes to point to government programs as having an impact on the economy like the New Deal rather than to the innovations of private industry.

Will the Fed Reintroduce QE?

44:00-45:40 discussion of whether the Fed will reintroduce QE if the economy continues to under perform. The Fed has tapered probably in response to criticism from the largest foreign holders of U.S. debt that they are diluting their interests with constant QE. Russia is already dumping their US Treasuries.

Belgium’s Purchase of Massive Amounts Of U.S. Treasuries

45:40-48:20 It seems that the U.S. Treasuries that the Fed had been buying via QE have been replaced by Treasury purchases being attributed to Belgium. Discussion of how these Treasuries are being purchased and who might be buying them and with what funds and why the Fed has not been questioned on this development given that the U.S would want to know which foreign entity owns so much of our debt. The Fed has been funding the U.S. deficit by buying 60-90% of newly issued Treasuries. Now it seems there is a replacement buyer in Belgium.

Why Are Interest Rates Falling as the Fed Tapers?

48:20 Discussion of the benefits a long term low interest rate mortgage. Discussion of the impediments to home sales. Discussion of the housing inventory shortage myth. Discussion of bailonomics. Discussion of why interest rates are not rising even though the Fed is curtailing its Treasury bond purchases. The US should want to know as a matter of national security whomever in Belgium is buying massive amounts of Treasuries. Why are they buying them, will they continue? Discussion of the Fed funds rate. Is QE necessary to keep interest rates low?

Stocks Soar While Housing Market Stumbles & GDP Turns Negative

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Further Reading:

Housing Inventory Shortage Myth

Initial Jobless Claims

Largest Foreign Holders of US Treasuries

Reuters Reports on Belgium Buying of U.S. Treasuries

Millennials Not Part of the Club Yet

Initial Jobless Claims

Obama, Fannie Mae and Freddie Mac Hit the Panic Button on Housing

The Dark Side of Artificially Low Interest Rates

Royal Canadian Mint

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