Category: US Economy

Negative Real Rates Aren’t Reversing Anytime Soon: Paul Podolsky

Money has flowed into the economy in a short period of time without sparking inflation or causing real rates to rise and should open the door to more aggressive fiscal action.

(Bloomberg Opinion) — The collapse in real interest rates to below zero means the U.S. government is being paid to borrow and spend. This is obviously rare, but that doesn’t mean the situation will soon reverse. Absent a low probability event like mass civil unrest or a balance of payments crisis, about the only thing could spur real rates to turn positive would be a massive infrastructure plan by the government.

Now would seem an ideal time for the government to borrow and spend to fix the nation’s increasingly creaky infrastructure. The World Economic Forum ranks the U.S. 13th in the world in terms of the quality of infrastructure, well behind places like Singapore, Switzerland and Germany. But although there is bi-partisan support for additional infrastructure spending, plans put forth by both Republicans and Democrats are too small to move the needle in terms of boosting economic growth by enough to meaningfully push real interest rates, or those after accounting for inflation, back above zero.

This has enormous implications for financial markets. Declining real rates have been the tail wind behind the 40-year upswing in the stock market. Real rates, especially those at the longer end of the yield curve, are a key factor for investors in determining the appropriate price-to-earnings ratio for equities. In short, the lower the real rate, the higher the ratio investors should be willing to accept. But should real rates rise, asset markets will need to re-price, potentially demolishing popular bets like those on technology stocks, gold and illiquid credit assets.

Although tighter coordination between fiscal and monetary policy coordination make it much easier to pull off a big infrastructure program, I’m betting the government is too timid take advantage of the remarkable opportunity in negative real rates. As a result, I’m sticking with an asset allocation that benefits from real rates staying low or even becoming more negative.

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    Hundreds of thousands of people looking for suburban homes — Sternlicht on exodus from cities

    “I would say it’s not as driven by the Covid situation as it is safety and law and order,” global investor Barry Sternlicht told CNBC.

    Global investor Barry Sternlicht told CNBC on Tuesday he believes masses of people are moving away from major U.S. cities in favor of the suburbs.

    “There’s hundreds of thousands of people looking for suburban homes, and I would say it’s not as driven by the Covid situation as it is safety and law and order, and that is now pervasive across the big cities of the United States, sadly,” Sternlicht said on “Squawk Box,” referring to recent protests that have sometimes turned violent.

    Tax policy is another force that could be playing into the desire for affluent people to relocate from large cities such as New York, said Sternlicht, founder and CEO of investment firm Starwood Capital, which focuses on areas such as real estate and energy infrastructure.

    Although cities may be facing declining revenues as a result of the coronavirus pandemic, Sternlicht said, “if you tax the wealthy even more in New York City … and they leave, then the social net has to be absorbed by the remaining residents and you can force them to leave.”

    “The Biden tax plan, which I’m happy to pay more taxes, but I don’t think this increase in the capital gains rate is a good idea for investment in our country, which we need to do,” he said. And if that passes and the the limit on state and local tax deductions is not repealed, “you’re talking 60% plus taxes on the wealthy in New York City, and they will leave.”

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      The recovery from the coronavirus sure looks V-shaped, going by these charts

      The U.S. economy added a record number of jobs in May as it appeared to bounce off the bottom of the coronavirus recession, and now the chart of jobs gains and losses is starting to look like a “V.”

      The possibility of a V-shaped recovery — a sharp fall in economic activity followed by a dramatic rise — has been a hot topic of debate since the coronavirus pandemic led to widespread business closures across the United States. The shape of the economic recovery is a popular guessing game on Wall Street with economists and pundits suggesting everything from a “V” to a “W” to even a Nike Swoosh as businesses were slower to get back to normal.

      The better-than-expected jobs report follows a series of other recent data points that have shown a quick recovery from their pandemic-era lows and point to a V shape.

      Mobility data from Apple showed that requests in directions for driving and walking had nearly recovered to pre-pandemic levels by June 1. The increase in travel demand has extended to flying as well, with major airlines announcing this week that they are bringing back some of the flights that they had suspended due to the pandemic.

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        Nearly half of Americans have anxiety over their debt

        This is causing physical and mental distress

        Adults in the U.S. over the age of 18 say they have an average of $29,800 in personal debt (not including mortgages), and 15% of Americans say they think they will be in debt for the rest of their lives.

        According to Northwestern Mutual’s 2019 Planning and Progress Study, this is still an improvement from last year’s average of $38,000 in personal debt.

        “The road to financial security is long, even in the best of circumstances,” Emily Holbrook, senior director of planning at Northwestern Mutual, said in a release. “By carrying high levels of personal debt that road gets even longer, often requiring all kinds of detours and other twists and turns. The fact that there’s been some year-over-year improvement in debt levels is good, but the numbers still remain worryingly high.”

        An average of 34% of people’s monthly income goes towards paying off debt, the study showed, while another 34% of respondents said they aren’t sure how much of their monthly income goes towards paying off their debt.

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          This is how America’s housing affordability is impacting credit quality

          Affordability has returned to average historical levels, and it’s having a ripple effect.

          It’s official: The era of unusually affordable housing has ended. Well, according to a recent Moody’s Investors Services analysis.

          The organization claims that America’s housing affordability has returned to average historical levels, therefore impacting credit quality across numerous housing-related sectors.

          “Homes are no longer relatively cheap on a national basis, and certain market segments are in worse shape, reflecting supply-and-demand imbalances stemming from the 2007 through 2012 housing slump, as well as demographic changes and the long U.S. economic expansion and its unevenly spread benefits,” Moody writes. “Reduced affordability is also a lingering issue in the rental market, where the effects are in some ways more severe.”

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            Slower, More Sustainable U.S. Economy Emerges

            The Federal Reserve’s dovish pivot has been reinforced by the abundant liquidity in the capital markets, according to David Shillington of Marcus & Millichap Capital Corp.

            Amid ongoing strength in the domestic economy, concerns over the global economy present a more balanced approach to the growth outlook for this year. Weaker data in Europe and Asia, coupled with the risks associated with a broader U.S. trade war with China, represent potential economic downsides.

            As a result, the rapid economic expansion that dominated the U.S. economy in 2018 has largely been replaced with a slower and more sustainable scenario. The Federal Reserve has eyed these developments, putting further rate hikes for this year on hold at its latest meeting in March. The Fed also announced plans to end quantitative tightening, its process of reducing its balance sheet, by September of this year. This follows a tumultuous fourth quarter in financial markets, with spiking volatility in equity markets leading to a steep drop in 10-Year Treasury yields from nearly 3.25 percent to 2.5 percent, the lowest level since the beginning of 2018. The yield curve has begun to price in a much more dovish Fed, with flattening interest rates across a range of maturities leading to a partial inversion in some short-dated issues.

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              This housing market clue predicts pending economic slowdown

              A key indicator of economic health is steadily declining, and it’s raising red flags.

              When it comes to the health of the economy, the housing market is the canary in the coal mine, providing clear and early clues of pending trouble. And that’s why analysts track its performance intently, looking at a multitude of indicators that might signal the looming recession some are forecasting.

              Now, one critical clue from the housing market has emerged to suggest economic growth is likely to backslide, and that is a steady decline in single-family authorizations.

              In essence: Construction activity appears to be slowing.

              Single-family housing authorizations – what some call a key predictor of economic recessions – represent building permits requesting permission to commence construction. In contrast, housing starts signal that construction has already begun.

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                Existing home sales plummet in December

                What will the ongoing government shutdown mean for future sales?

                After seeing gains in previous months, existing home sales dropped suddenly in December, seeing double-digit losses from the year before.

                Both October and November saw gains in existing home sales, but that all changed in December, according to the latest Existing Home Sales report from the National Association of Realtors.

                Total existing home sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, decreased 6.4% from November to a seasonally adjusted rate of 4.99 million sales in December. This is down a full 10.3% from December 2017’s 5.56 million sales.

                Realtor.com Chief Economist Danielle Hale explained this is the first time in three years that existing homes sales slipped below the 5 million mark.

                Due to the ongoing government shutdown, some might wonder what the effect has been on real estate, and if it is to blame for the decrease in home sales. NAR explained that it did not, saying, “The partial shutdown of the federal government has not had a significant effect on December closings,” said NAR President John Smaby.

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                  U.S. Home Prices at Least Affordable Level Since Q3 2008

                  ATTOM Data Solutions, curator of the nation’s premier property database, today released its Q2 2018 U.S. Home Affordability Report, which shows that the U.S. home prices in the second quarter were at the least affordable level since Q3 2008.

                  The report calculates an affordability index based on percentage of income needed to buy a median-priced home relative to historic averages, with an index above 100 indicating median home prices are more affordable than the historic average, and an index below 100 indicating median home prices are less affordable than the historic average. (See full methodology below.)

                  Nationwide, the Q2 2018 home affordability index of 95 was down from an index of 102 in the previous quarter and an index of 103 in Q2 2017 to the lowest level since Q3 2008, when the index was 86.

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                    Economy Watch: Most Metro Areas See Declining Unemployment

                    Unemployment rates were lower in May 2018 than a year earlier in 350 of the 388 U.S. metropolitan areas, higher in only 20 areas, and unchanged in 18 areas, the Bureau of Labor Statistics reported on Wednesday, June 27. Ninety-six areas had jobless rates of less than 3 percent—the national rate is currently 3.8 percent—and a mere two areas are suffering unemployment rates of more than 10 percent.

                    Farmington, N.M., had the largest year-over-year unemployment rate decrease in May, down 2.2 percentage points. Another 52 metro areas had rate declines of at least 1 percentage point since a year ago. The largest year-over-year unemployment rate increase occurred in the Morgantown, W.Va., metro area (up 0.8 percentage points).

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