“Demand is artificially high … and supply is artificially low.” Fitch Ratings
We’ve written frequently about the disconnect between the real world and the stock and bond markets. Now the housing market has drifted into its own false reality.
While Gluskin Scheff’s David Rosenberg has referred to the stock market’s recent climb as a “Potemkin rally,” what’s happening in housing is Potemkin in reverse.
Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term “Potemkin” to mean an illusion, reality propped up to look bigger and better than it really is.
“I’m forever blowing bubbles,
Pretty bubbles in the air
They fly so high, nearly reach the sky
And like my dreams they fade and die.”
From “Forever Blowing Bubbles”
Bubbles are everywhere, according to Bill Gross, aka The Bond King.
According to Gross, there’s a bubble in Treasuries, a bubble in narrow credit spreads and a bubble in high-yield prices. The stock market appears to be in a bubble, too.
The problem with bubbles is that we won’t know we’re in one until it pops. And when it pops, it’s too late to do anything about it. A bubble can cause all sorts of problems, as you may recall from the dot-com bubble in the ‘90s and the housing bubble in 2008.
If baby boomers decide to postpone their retirement, it may not solve all of the country’s economic problems, but it will help address most of them.
So it’s good news that a growing number of boomers are postponing retirement. Today, almost 18% of people older than 65 are still working and the number is climbing. In 1993, only 11% of people older than age 65 were still working, according to the Bureau of Labor Statistics.
Of course, many boomers will be forced to keep working, because they have not saved enough or because the performance of their retirement portfolio has not met their expectations.
Others, though, will keep working simply because they want to work.
President Obama and the Federal Aviation Administration blamed recent flight delays on sequestration. Now the Federal Reserve Board’s Open Market Committee is blaming sequestration for the poor performance of the U.S. economy.
Both claims are equally frivolous.
As The Wall Street Journal noted, “The FAA’s all-hands furloughs managed to convert a less than 4% FAA budget cut into a 10% air-traffic control cut that would delay 40% of flights. The 6,700 flights that the FAA threatened to force off schedule every day is twice as many delays as the single worst travel day of 2012.”
With members of Congress among those affected by the flight delays, Congress acted with uncharacteristic quickness and approved a bill to revoke FAA’s politically motivated furloughs.
Like most promises made before an election, the promise of an economic recovery is beginning to look like a false promise.
Last fall, the housing market was showing signs of recovery and the unemployment rate was dropping. The stock market since then has been propelled upward by the artificial stimulus of quantitative easing.
Now, though, economic indicators are less promising. The Conference Board reported today that, after three months of gains, its index of leading indicators dipped 0.1% to 94.7 in March.
When the unemployment rate declines, even by a little bit, it should be good news. But when it declines because people are leaving the workforce in record numbers, it’s not.
The U.S. Bureau of Labor Statistics (BLS) reported that the unemployment rate is now 7.6%, down from 7.7%. But this 0.1% drop is due entirely to a drop in the labor force by 663,000 in March.
Non-farm payroll was expected to increase by 190,000 in March, with the lowest forecast at 100,000. Instead, it increased by a meager 88,000 jobs.
As Zerohedge.com reported, a record 90 million Americans are no longer even looking for work. The labor force participation rate dropped from 63.55% to just 63.3% – its lowest level since 1979.
The BLS reports the U-6 unemployment rate for March at 13.8%, which is a more accurate number than the U-3 rate of 7.6%, as it includes those who have been unemployed long-term.
“In your life expect some trouble
But when you worry
You make it double
Don’t worry, be happy…”
Bobby McFerrin
Higher and higher. The stock market has gone in only one direction since our last post and that’s been up.
As of yesterday, the Dow Jones Industrial Average had risen for 10 straight days for its best performance since 1996. The S&P 500, likewise, surged past 1,560 having gained 3.05% in the past month.
Don’t worry, be happy
And, so what if the world is going broke, if that genius Ben Bernanke continues printing money, the Dow could rise from its current 14,500 range all the way up to 18,000 by the end of the year, according to Wharton School Professor Jeremy Siegel.
In another reversal of fortune, equity funds reported an outflow of more than $4 billion this week, the largest this year. Commodity funds, meanwhile, saw an outflow of $3.2 billion, their largest weekly outflow ever.
Just when investors appeared to be headed back into the market, could it be that they’ve changed their mind?
Maybe investors were reacting to press reports that airplanes would be falling out of the sky, schools would be closing and the Four Horsemen of the Apocalypse would be visiting today because of a 2.3% nick to the federal budget caused by sequestration.
It’s like “Cash for Clunkers,” only for consumers.
You may remember that brilliant piece of Congressional economic planning, where an effort was made to boost auto sales by creating an incentive for consumers to trade in their old, environmentally suspect clunkers for new, higher mileage models.
“Cash for Clunkers” did, indeed, boost auto sales. Until the program stopped, at which time sales plummeted. Side effects included rising auto prices, a $3 billion cost to taxpayers and a negative impact on the environment, since many of the 690,000 vehicles traded in were shredded, not recycled.
Today’s equivalent is the tax increase that took place Jan. 1 to avoid the fiscal cliff.
Exuberance was abundant when economic data for December showed a rise in personal savings. Yet the exuberance turned out to be irrational; much like the initial glee over rising sales during “Cash for Clunkers.”
If you think Fed Chairman Ben Bernanke has a firm grasp of the economy, you may change your mind after listening to Bain Capital co-founder Coleman Andrews quoting Chairman Bernanke in the accompanying video.
Andrews cites three quotes that show The Fed czar was out of touch with economic reality during the run up to the Great Recession. And now, he asks, “would you trust your life-savings to an institution with that recent record of completely missing what happened in the housing sector and more broadly in the economy?”
Brenda Wenning has 22 years of investment management and security analysis experience. Her company, Wenning Investments, applies the same principles discussed in this blog.
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