The Labor and Real Estate Markets and Interest Rates – Podcast 11.8.13

The Labor Real Estate Markets and Interest Rates

JM Bullion

Consumer Confidence in The Housing Market Hits All Time Low

Podcast Summary:

Intro: 0:00-4:42

Ryan introduces the program and reviews the European decision to lower interest rates and impact on U.S. mortgage rates. Ryan notes the 3rd Quarter GDP growth of 2.8% and initial jobless claim data. Ryan notes the just in non farm payroll report of 204K that came in much higher than expected and notes that pending mortgage applications were down.

Taper Watch 4:42 -9:00

3rd Quarter GDP Growth?

Louis notes that we continually have had conflicting economic data for the past five years during which quantitative easing (QE) has been in effect. The data sometimes seems to indicate that there is an economic recovery, but then it doesn’t and when it doesn’t the Fed has its justification to continue QE.

Louis discusses the GDP growth in the 3rd quarter and notes that a good portion of it was inventory build up which is a one time event and that the personal consumption aspect of the GDP number wasn’t strong at all and further notes that business cut down on spending in the third quarter.

Louis observes that what ever GDP growth we got was from QE! Take QE away and that growth is gone.

Labor Market

Louis notes that 300K+jobless claims are filed each week and only 150-180K jobs are created each month according to the non farm payroll report from the Bureau of Labor Statistics.

Louis questions the quality of the jobs reported in the October report (i.e. which sectors were they in) and what percentage were part time jobs and whether the report is an anomaly in that it may reflect higher numbers to make up for lower numbers in prior month.

Louis says that no matter what the underlying employment data shows, the knee jerk reaction will be that the economy is improving and expectations that the Fed might taper QE will come back into play.

Louis notes that the entire stock market and economy is based on QE and references the multi billion dollar Twitter IPO.

Louis says that stock prices are not reflective of the health of the economy.

Housing- Consumer Confidence at an All Time Low – Fannie Mae National Housing Survey

Louis mentions that the prices of homes may have gone up but that 25% of homes are still underwater creating an inventory shortage. Louis also notes that millions of foreclosures have not yet cleared the market. Louis notes that both the real estate and stock markets benefit from artificially low inventory and artificially high demand. Louis notes the October Fannie Mae National Housing Survey that shows that consumer confidence in the housing market is at an all time low, yet Fannie Mae is still predicting that home prices will rise!

Wall Street vs. Main Street

Louis says that the money flowing into the stock market and housing market is Wall Street money not Main Street money as a result of QE. Remove QE and both markets crash.

Louis references that “green shoots” “recovery summer” “wait till next year” are chants we have heard every year for five years about a supposed economic recovery that never develops. Louis notes that the Fed continues with QE because the recovery still hasn’t happened. Louis says that if the economy is doing well, then pull the plug on QE and see what happens.

The Fed’s Fall Back Taper Excuse- Wait and See 9:00-12:20

Ryan notes that the recovery never comes but that the Fed needs to portray the image that the recovery is just around the corner and notes the Fed’s manipulation of interest rates and markets. As such Ryan believes that the Fed may be able to keep rates low for a while. Ryan notes that higher rates would damage the Fed so they have a vested interest in not allowing them to rise.

Louis notes that interest rates rose immediately after the non farm labor report came out and predicts that if rates continue to rise the Fed will knock off the taper talk and start questioning the strength of the job market and say that it is not that good and point to the all time low labor participation rate.

Ryan notes the Fed will take a wait and see stance to make sure the economy is recovering before making a tapering decision. Louis notes that during any such waiting period, there will be adjustment and reinterpretation of the numbers and weak economic data will be released causing the Fed to put off a taper decision.

Just When I Thought I Was Out…

An Asset Price Driven Recovery 12:20-14:10

Ryan notes that the markets are driven solely on what they think the Fed thinks about economic data releases. Ryan notes that if rates go much higher the wall street money would leave the real estate market.

Louis says that the “recovery” is solely asset price driven with no underlying improvement in the underlying assets.

Two Reasons Why Interest Rates Might Rise 14:10-18:20

Ryan thinks the Fed will be able keep interest rates low. Ryan does not believe the Fed will taper QE.

Louis says there are two factors that would cause interest rates to rise:

– the perception that the economy is improving or;
– the market demands higher interest rates due to the risks involved in lending to the US with its dysfunctional monetary and fiscal policies and endless taper bluffing.

Louis notes that the latter is dangerous to the health of the dollar that the Fed loves the former scenario because it can always talk rates down from the perception that the economy is improving.

They, however, are helpless if the market turns against them. Louis notes that if rates were to rise on the back of today’s non farm labor report, that Bernanke and the Fed Presidents will immediately start talking about how the underlying data is weak and perhaps there won’t be a taper of QE and mentions that Bernanke will be speaking later today.

Indeed, Bernanke and his cohorts did just that later in the day.

Ryan notes that there really is no economic recovery. Ryan notes that higher home prices are a gift to home owners who wish to sell. Louis says that low interest rates are a gift to the “one percent”.

Ryan and Louis discuss whether its better to put a larger down payment in order to get a lower interest rate or to preserve cash and and pay a higher rate.

The Labor Market and Real Estate 28:00-28:51

Louis notes that fewer people working means fewer people that can qualify for mortgages to buy homes. Louis notes (with skepticism) that while 200K new jobs were created according to the non farm labor report, 932K people left the labor force in October. Louis notes that the Fed will also consider this number.

The Media Reporting of Economic Data and The Fed’s Interpretation of It

Ryan and Louis note that the media like to put a positive spin on the economic data and reads a recent Reuters headline. Louis notes that the media only notes that interest rates are at an historic low but rarely explains why (i.e. that the Fed is printing $85 billion a month to artificially drive rates lower).

Louis notes that good news is bad news because the Fed will taper QE and bad news is good news because it means the Fed will continue QE. Louis predicts that later today Bernanke will downplay the positive labor data. Bernanke did just that later in the day! Louis predicts that Yellen will try to improve the labor market by using QE and will increase it.

Money Printing, Taper Talk and Wait and See

Louis notes that the Fed has two tools that it uses to manipulate interest rates and the economy:

– their ability to print money and;
– their ability to say they won’t print money.

Louis predicts later today the charade of the Fed downplaying positive data will continue to make sure rates don’t go too high. If rates drop the Fed will start talking taper again. Louis notes that the Fed has a large number of excuses not to taper.

Louis thinks the “wait and see” approach is comical as the Fed has been “waitin’ and seein” for five years.

QE Benefits the One Percent 37:14-39:20

Louis notes that QE is trickle down economics worse than supply side economics and notes that under QE the money goes directly to the top.Louis notes that QE has caused luxury asset prices like art and expensive homes to rise.

Louis explains how the wealthy are not harmed by inflation of the money supply as they receive the dollars first.

What’s Next for the Fed 39:20-46:26

Ryan predicts more QE from Janet Yellen. Louis speculates (but doesn’t really believe) that the Fed might taper in December causing a crash giving Yellen an opportunity to double down on QE in her new term. Ryan believes its possible but probably not. Ryan also believes that rates will stay low during the duration of the Obama presidency. Louis agrees and notes the Fed won’t intentionally allow rates to rise. Rates will rise only due to external events.

Louis notes that taper talk is ridiculous as there has already been QE’s 1, 2 and 3 and they were all “tapered” leading to yet more QE. Louis notes with loose monetary policies in Japan and Europe the Fed won’t be able to taper and there is no way they can shut down QE and think that they can keep rates low just by setting the Fed funds rate low.

Louis draws the Peanuts analogy where every time we think the Fed is going to taper QE they don’t – just like Lucy in the Peanuts cartoon. Every time she tees up the football for Charlie Brown to kick and we think she is finally going to allow him to kick the ball, she pulls it away and Charlie Brown kicks the air and tumbles to the ground even when Lucy promises NOT to pull the ball away.

I Promise, This Time, I Won’t Pull the Ball Away

Louis says that its hard to take the Fed seriously after their no taper decision in September when they said the vote was “close” and they might taper in October.

Interpreting the Jobs Numbers

Louis says he does not believe the non farm payroll data released today and notes that perhaps more jobs were created to fill the jobs left by the 900K+ that left the labor force and jokes that if the new jobs were created during the government shut down that perhaps they should shut down the government again to create more jobs.

Ryan and Louis note that there will be another budget debate in January and Louis predicts the Fed will use that in December as an excuse not to taper due to the uncertainty regarding the upcoming budget talks (while noting that “while the economy is improving…”).

Louis argues that people moving in and out of houses doesn’t drive an economy. Louis says if that were the case the government would mandate that people would have to move every five years. Louis notes that production is what drives an economy.

If the Fed doesn’t taper in December we know they are bluffing about QE.

If they do taper and the market “corrects”, Yellen’s first move will be to increase QE.

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Further Reading:

Bernanke talks down non farm labor report

The False Housing Recovery of 2013

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