The markets were quiet again this week and volatility is still low. As we wait with baited breath for the central bankers to make their next moves, one thing remains certain. We are all in serious need of more fiscal responsibility. Rodney Johnson, president, Dent Research put it this way after spending some time with David Walker, former Comptroller General of the United States, “Most people are aware of the $19 trillion we owe in national debt. But once you add in expenses like unfunded civilian, military pensions, and environmental cleanup obligations, the nearly $13 trillion in unfunded obligations for Social Security, and the nearly $27 trillion in unfunded obligations for Medicare, our national debt is actually upwards of $65 trillion.” If that’s too much to digest, we can all agree that chickens do come home to roost. The hard work that needs to be done could begin by establishing a firm debt-to-GDP limit, says Rodney.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on August 26, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
New Home Sales Jump 12.4% in July… The move puts new home sales up more than 30% from the same time last year.
What it means – Demand for new homes remains solid, as sales are at their highest level since 2007. Still, the current pace is less than half of what it was at the height of the boom. Interestingly, the median home price fell a bit last month, perhaps showing that builders are discounting to keep inventory moving.
As we have noted before, the upward pressure on home prices will eventually cause the industry to slow down. With every jump in price, more buyers are left out of the market.
Existing Home Sales Down 3.2% in July… Prices on existing homes also dipped. Sales are 1.6% below the level of last July.
What it means – Single-family home sales were off 0.8%, while condo sales dropped 8%. Existing home sales are almost 10-times larger than new home sales, so this sector provides a better look at the overall industry. Soft prices and modestly weaker demand aren’t good signs. We’ve been warning of a top in real estate for some time, noting that the price increases aren’t sustainable by current wage growth. It looks like this is finally taking hold.
U.S. Durable Goods Orders up 4.4% in July, up 1.5% Excluding Transportation… Over the same period last year, durable goods orders fell 3.3%, and down 0.6% excluding transportation. Core capital goods, a proxy for business spending, slipped 4.9% compared to last year.
What it means – The jump in durable goods orders is nice to see, but one month doesn’t make a trend. Orders have disappointed for almost a year, which is why the strong showing in July couldn’t push them close to even over the last 12 months. Deeper in the weeds, Capital Goods Shipments, Nondefense, Excluding Aircraft (a better proxy for business investment) dropped 0.4% for the month, and is off almost 10% over July 2015.
It will take several months of strong showings to make up that difference, and I don’t think it’s going to happen.
Japanese Central Bank Will Own Majority Share of 55 Companies by 2017… At its current pace of purchasing Japanese ETFs, the Bank of Japan (BoJ) will own enough shares to control more than 50 companies in the Nikkei Index in just two years.
What it means – BoJ officials are past the point of rational decision-making. Now, they’re just throwing spaghetti at the wall, hoping something will stick. There’s no doubt all of their intervention policies will have an effect, there’s just no telling what it will be. What happens when central bankers force out ordinary investors? What happens when politicians can replace board members and influence corporate governance? Aside from this issue, what happens when there aren’t any Japanese around to care? While the BoJ officials fiddle, their country is going up in flames. Buying more ETFs won’t jumpstart the economy, and it certainly won’t encourage young Japanese to marry and have children.
Lithium Demand Outstrips Supply in 2016… New supply will bring markets to equilibrium in 2017, but by 2018 demand should again outpace supply.
What it means – The U.S. Geological Society estimates the world holds enough lithium for 350 years’ worth of demand. But that is at current usage rates. Tesla’s not the only company building a gigawatt factory; LG Chem also has one underway. And that won’t be the end.
With so much smog and pollution in China, the Middle Kingdom is desperate to embrace electric vehicles, and therefore use more lithium. Unless there’s a breakthrough of some sort, the previously boring market for lithium could heat up quickly. It makes Charles Sizemore’s Boom & Bust pick of Albemarle, one of the purest lithium plays available, look very smart.
Illinois Governor Warns Teachers’ Pension Against Lowering Assumed Rate of Return… Noting that a lower expected rate of return would require higher pension contributions, the governor warned pension administrators that the outcome would be disastrous.
What it means – This makes perfect sense. The Teachers Retirement System (TRS) is only 41.5% funded, so it has less than 50 cents of assets for every $1 worth of liability. The fund assumes it will earn 7.5% per year, which is straight out of fantasyland.
As the governor notes, if the TRS lowers its expected rate of return to something reasonable, like 4% or 5%, it would require much higher contributions by the state and teachers.
The much better choice is to ignore the problem completely, and let the system continue its death spiral and drain all of the assets. This way the governor can avoid the hard choices, leaving them for future administrators. Brilliant.
The Federal Reserve Created a Facebook Page, and the Comments Are Overwhelmingly Negative… The Fed posted press releases and transcripts of governor speeches, but the comments were directed at the Fed’s structure, ownership, and general reason for existing.
What it means – Well, we don’t know how low the bar goes, but at least we have a frame of reference. It’s obvious the Fed can’t manage the economy, however that’s a tricky proposition. Now we know the Fed can’t even handle a Facebook page, which most any nine-year-old can tackle.
What were they thinking? Didn’t they learn anything from the JPMorgan “conversation” on Twitter? People are angry with the Fed, and rightfully blame the officials for stealing their retirement through manipulated interest rates. When given a chance to blast the central bank, especially in a public way, they’re going to take it!
Next Week – The week of August 29 includes the S&P/Case-Shiller Home Price Index and manufacturing numbers from China. But all eyes will be on the U.S. Employment Situation report on Friday. Until then, investors will spend their time parsing the words of the central bankers at Jackson Hole.
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