Once again, it’s all about central banks! The European Central Bank
announced no change in policy yesterday. The Fed and the Bank of Japan
will announce monetary policy decisions next week. To Central Banks, economics
is no longer a matter of supply and demand, free markets and rebalancing.
They think they have found a way to program the economy like a thermostat
on the wall, so we never have a recession again. That may work for a while.
But, Mother Nature and Father Time hold the trump cards.
Stocks continue to move higher on the hope of continued stimulus. Money flowed into risk assets like equities and out of the safety of bonds, pushing U.S. Treasury rates higher.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on April 22, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
U.S. Housing Starts Fall 8.8% in March… The rate fell for both single-family and multifamily units. Permits fell
7.7% for the month.
What it means – Maybe the National Association of Realtors was on to something last month when it called the drop in housing “meaningful.” March is the official start of high season for housing, so the lower numbers were surprising. The year-over-year figures are pretty good, with starts up 14.2% and permits up 4.6%, but the slowdown points out something we talk about every month – people on both sides of the transaction, builders and buyers, aren’t ramping up to previous levels of activity. Home builders might be peaking here. For investors that have ridden those stocks higher, be careful!
Existing Home Sales Up 5.1%, Not Enough to Reverse February’s 7.3% Decline… Sales rose a mere 1.5% over March of last year.
What it means – Sellers should be happy, since the median sales price rose 5.7% over last year, but overall existing home sales point to the same trend as housing starts – a topping market. The warm winter could have skewed data in January and February, but March is a prime selling month, so I give more weight to the recent tepid results.
If housing plateaus at current levels, the knock-on effects could reach all the way back to furniture stores, appliance makers, and other retailers in the space. I don’t expect sales to drop off dramatically in the next few months, but a slower growth rate, or no growth at all, would be a significant blow.
Oil Production Talks Fail, Then Kuwaitis Strike… Saudi Arabia dismissed any production cut if Iran, which skipped the meeting, did not partake. Oil fell briefly below $40 per barrel before rebounding on the news that Kuwaiti oil workers were out on strike.
What it means – I was right… for about six seconds. Oil prices fell dramatically when the talks failed, but the Kuwaiti news reversed the losses and then some. Oil prices rose again when the API reported that U.S. oil production fell to 18-month lows. Still, U.S. inventory rose to yet another record: 538.6 million barrels. That’s a lot of oil.
Given the international politics at play, I don’t think we’re at the bottom of the oil market yet. The Saudis still have room to ramp up production, and they want to punish the Iranians for, well, just about everything that’s happened since 632 A.D. when the prophet Mohammed died without a clear successor.
Using the price of oil as a weapon is common. At the same time, Saudi Arabia is doing a great job of crushing U.S. frackers, which helps the Middle Eastern country consolidate its market share. When prices do eventually rise and hold onto gains, fracking will be profitable again, but only if producers can lure workers back to the fields. With the U.S. rig count down by well over 1,000, the skilled workers have moved on. Who will take the bait and go back to the oil fields only to live with the threat of being laid off again? Fracking production will ramp up, but more slowly than most people expect.
The European Central Bank (ECB) Leaves Monetary Policy Unchanged… ECB President Mario Draghi reported that the bank started buying European corporate bonds as part of its latest QE program.
What it means – The announcement was anticipated, given that the ECB had just increased its easing policies at the last meeting. But after the announcement, something interesting happened. The euro strengthened. Not by a lot, but still, it was noticeable. Recall that, contrary to expectations, the yen strengthened after the Bank of Japan (BoJ) announced negative rates.
It feels like central banks are starting to lose control. If that is the case, this could get very interesting in the months ahead!
BoJ Governor Kuroda said They Would Ease More if Necessary… BoJ officials are trying to talk the yen lower, since negative interest rates didn’t work.
What it means — Japanese banking officials have problems. The country’s GDP growth stalled, inflation sits at zero, and when they implement policy to weaken the currency, it goes the opposite direction. What’s a banker to do? The BoJ is losing twice. Not only have they failed to foment inflation and boost exports, but they’ve also lost credibility. If negative rates didn’t drive down the yen, then deeper negative rates probably won’t have much of an impact. Eventually, they’ll have to do something big and weird. I think they’ll go for some version of direct distribution of newly printed cash to be spent. This is so-called helicopter-money. If they go down that road, expect the yen back above 120 very quickly.
Chinese Companies Take Longer to Pay Bills… Companies listed in Shanghai and Shenzhen now take an average of 192 days to pay their bills, up from 125 days five years ago.
What it means – Taking 125 days to pay bills seems like a bad deal for the vendor, so more than half a year sounds outrageous. The problem is that if companies are strapped for capital to pay bills, then vendors are probably dealing with the same issue from many clients. This moves up the supply chain, causing disruptions and dislocations. We expect many more defaults in China, which will most likely lead to greater civil unrest as fired/laid off/locked out workers demand their back pay and help from the government.
Argentina Sold Bonds in the International Market… The country had the largest emerging market default in 2001, and now has the largest emerging market bond sale.
What it means – It’s amazing what short memories and greed will do. Argentina recently negotiated a settlement with holders of defaulted bonds. This allowed the country to access international debt markets for the first time in years. But the settlement didn’t do anything to fix Argentina’s finances. The country has almost no foreign reserves and suffers with high inflation and mounting debt. The new bond issue was slated to be $15 billion, but after receiving orders for $70 billion, they increased the size of the deal.
This has all the hallmarks of the Puerto Rico bond sale two years ago. Investors should treat it the same. Stay away. Let big institutions take the risk. The nation might not be as bad off as Puerto Rico, but I think the bonds will lose value quickly when they start trading.
And of course, the new bonds are full of clauses that give Argentina the most wiggle room if they fail to pay, so buyers won’t have the U.S. courts to bail them out this time around.
Fed Survey Finds 47% of Americans Don’t Have $400 for Emergencies… When asked how they would meet an unexpected $400 expense, 47% of survey respondents said they would borrow the money, sell something, or would not be able to pay for it.
What it means – I’m a statistics skeptic. When I read this, I immediately thought of myself. I would probably “borrow” the money as well, using a credit card, as I do for just about every expense, so that I can earn the bonus cash. But then I’d pay it off at the end of the month so as not to incur a finance charge. Does that put me in the 47%? I’m not sure. But with that caveat in mind, I think this is one more sad commentary on the financial state of many Americans. We simply do not save enough. It won’t end well. If you are saving, and can come up with $400, I bet the tax man is going to ask for more of it in the years to come.
Next Week – The last week of April is chock full of economic goodies, from the first estimate of first-quarter GDP, to durable goods and the S&P/Case-Shiller Home Price Index. But everyone will be waiting for the announcement following the Fed Open Market Committee meeting, which comes out on Wednesday. The Bank of Japan will also announce the results of its latest meeting on Wednesday.
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