What Impact Will Syria Have On Fed Monetary Policy – Podcast 08.29.13

Podcast Summary

Ryan reviews the new home sale data that was released last week and was well below expectations. Ryan notes that it takes negative economic news to drive interest rates down. Ryan notes that the market is expecting the Fed to taper and that the recent GDP revision to 2.5% is being touted as a sign of an improving economy as was the latest initial jobless claim data that came in at 331,000 just below expectations. Ryan believes that we won’t see lower interest rates and that a new range of rates will between 4-6% will be normal.

Louis notes that the economic data in the aggregate is not good-even the GDP number masks weakness. Louis believes that the Fed is moving inexorably towards tapering, mostly because the Fed has signaled it and the market expects it.

The Fed has Room to Taper
Louis raises the point that because the deficit has gone down this year in part because Freddie Mac has returned a large sum of money to the treasury and therefore the borrowing needs of the US government have been reduced and therefore doesn’t need the Fed to buy $45 billion a month of US Treasuries and can get by with a tapered amount of purchases for a while.

Initial Jobless Claims
Louis also notes that Reuters continues to characterize the initial jobless claim data as indicating strong job growth. Louis points out that fewer people losing their jobs does not mean more people getting jobs.

Syria and The Fed
Louis notes that if the Fed tapers they will come right back with more QE. Louis predicts the Fed will note if the market tanks that they did not expect it and reinstate QE and perhaps use Syria as an excuse to do more QE.

Ryan believes that the Fed will not taper as long as Bernanke is President of the Federal Reserve (until the end of the year). Louis notes that the situation in Syria may cause the Fed to need to provide more “monetary support” if oil prices rise as a result and the economy deteriorates further. Louis notes that this may not be called QE and indeed be done outside of QE and called emergency crisis measures, that may be in excess of the current levels of QE.

Ryan and Louis discuss what happens to home prices as rates rise. Ryan discusses the behavior of those who has been spurred on to get a mortgage because of rising interest rates. Louis notes that this is an indicator of the end of the housing recovery.

Can The Housing Recovery Continue?
Louis notes that the housing recovery is investor driven and driven by luxury homes which indicates that the low interest rates environment created by QE has benefited the wealthy who are able to take advantage of the low rates.

Louis notes that the recovery is worse than the recession in that job and wage growth have not occurred. Louis notes that the average person has not benefited from the housing recovery and indeed higher prices impact home affordability.

Louis notes that it may be a good time to buy a home if the potential buyer has the ability to do so. Louis notes, unfortunately, many do not have that ability.

Louis notes that monetary policy can not create jobs as it can only create a debt based consumption economy that requires increasing amounts of debt and once the money is withdrawn there is noting left as no productive capacity was added.

Louis notes that people moving in and out of houses does not drive an economy. Louis notes that more and more money needs to be spent to create an decreasing return. Louis notes that the housing boom is nowhere near as grand as the current housing bubblet even though far more money has been spent via QE to achieve it.

Louis and Ryan discuss American Homes 4 Rent and note that 55% of their homes are rented.Louis notes if they are not successful in renting their homes they may have to sell them. Louis notes that this is the first time a company has tried to buy individual homes on a large scale basis and rent them out.

Louis notes the prevailing consensus is that higher interest rates won’t hurt the housing recovery.Louis asks who is going to buy the homes to sustain higher real estate prices.

Louis and Ryan review inflation data and note that housing, energy and food have gone way up the past few years even though the CPI shows inflation as benign.

Further Reading:
Why the End of Quantitative Easing May Be Bad for the Dollar (and good for gold and silver)

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Update September 2, 2013
The President has decided to consult with Congress before making a decision to attack Syria and want to consult with Congress when they are back in session on September 9.

We will monitor the impacts of shooting and printing if the United States gets involved in a shooting war with Syria. The combination of the two may create the “safe haven” impression and help support the dollar and lower interest rates.