Along with the new highs in stocks this week where the bubble just keeps on getting bigger, Turkey quashed a coup attempt, Britain elected a new Prime Minister and the Republican convention kicked off the week's fun.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on July 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.
Housing Starts Up 4.8% in June, Reversing Decline in May… Single-family housing starts increased 4.4% and multifamily starts moved up 5.4%.
What it means – Home builders will breathe a little easier knowing that housing isn’t sliding backward, but there’s not a lot of forward momentum, either. Housing starts climbed back to 1.189 million units on an annualized basis, which keeps the figure squarely in the 1.1 to 1.2 million range. It’s been stuck there since a surge in housing starts last summer. It’s as if builders are hesitant to put more capital at risk.
Existing Home Sales Up 1.1% in June, 3.0% Over Last Year… Existing home sales reached the highest rate since 2007, 5.57 million units on an annualized basis.
What it means – As long as builders remain cautious, existing home sales should remain steady. Although it’s notable that the year-over-year growth rate for both measures is falling.
At this point in the economic cycle and at this time of the year, housing should be on fire, but it’s not. Interest rates are near all-time lows and unemployment is solidly under 5%. What’s not to love about this economy? Oh yeah, income. We need more of that. And the cost of essentials, like healthcare and rent. We need less of that. And then there are those pesky student loans and car loans that millennials bring with them. You may remember the late 1980’s when interest rates where high, but the lines were long of people standing outside new home development openings. Those lines are gone now.
The European Central Bank (ECB) Left Rates Unchanged at Negative 0.40%... ECB President Draghi noted that the bank will maintain its rate of bond buying and will not change its collateral requirements.
What it means – The last part is the most interesting. Right now, the ECB only buys bonds that yield more than its primary interest rate of minus 0.40%. It sounds odd, but more than half of all German government bonds yield less than that, so they aren’t eligible for purchase. If things don’t change, the ECB could run out of German bonds to buy before Christmas, and yet its bond-buying program will run through October 2017.
The news of no changes drove German bond yields lower, which just makes things worse.
Bank of Japan (BoJ) Governor Kuroda Dismisses Possibility of Helicopter Money… Kuroda tamped down speculation that the BoJ might print money and deliver it directly to consumers in an attempt to spark economic activity.
What it means – Technically, this is probably true. I don’t think the BoJ will print a bunch of yen and ship it directly to spenders. That would break a lot of taboos in the central banking world. But there are a lot of ways to torture the logic and get some of the same results.
The government could issue perpetual bonds (that don’t mature) with an interest rate of zero, and the BoJ could buy them. The government could then use the money for a new fiscal program like a tax rebate. The result would be the same as helicopter money (free cash with no payback), but it wouldn't come directly from the central bank. This might be on the horizon. As Kuroda dismissed cash from the sky, rumors circulated that the government is contemplating a 20 trillion yen stimulus plan.
News of the grounded helicopters sent the yen up in value, paring early equity gains. It won’t last. I think the yen has a long way to fall, probably through 125 and perhaps beyond 135 before it’s all over. And given his history, I don’t believe a word Kuroda says. He and the rest of his crew will do whatever it takes to bring down the value of the yen in the months ahead.
Cass Freight Index Shows Shipping Down 4.3% Over Last Year, Expenditures Down 8.8%... Shipping and expenditures rose in June as they do every year, but have reached lower highs.
What it means – If they aren’t shipping as much stuff, it’s because retailers aren’t selling as much, which means people aren’t buying as much. At a time when everyone seems happy with the retail space, this is a red flag. If things are so great, as retail sales indicated last week, how can shipping fall? I don’t know the answer, but it makes me cautious.
With equity markets at record highs even though economic news remains muted, now is a great time to be very prudent with your investment dollars.
KeyBanc Upgrades Papa John’s Pizza Because of Social Strife… Equity analysts predict more people will stay home and order in, leading to increased pizza delivery sales.
What it means – The analysts put together two trends – falling casual dining sales and increased social unrest. Are riots in various locations and political rallies actually keeping people from restaurants? Who knows? But people still have to eat. Oddly, the conclusion could be right even though the logic is wrong.
So far, the protests and rallies are localized, leaving the rest of the nation free to choose any restaurant they want without fear of a hassle. But it could be that consumers see pizza delivery as a cheaper, and therefore preferable, alternative to dining out these days, as they try to make their modest incomes stretch a little further.
Insurance Premiums Set to Skyrocket Next Year… Insurance providers that sell on the government-mandated exchanges in Texas asked for premium increases of up to 60% for 2017. Insurance providers in other states have requested increases up to 40%.
What it means – Citing losses over the last two years, providers told regulators they must increase their premiums dramatically or risk even bigger losses. Government officials were quick to point out that most who buy insurance on these exchanges receive subsidies, so they wouldn’t bear the cost. But that’s not the whole story.
Millions of Americans actually pay the entire bill, and it hurts. For those that don’t, the bills are sent to the American taxpayer. Shifting the burden isn’t the same as fixing the problem.
Next Week – The last week of July is packed with economic news. We’ll get reports on new home sales, durable goods, U.S. second-quarter GDP, and the S&P/Case-Shiller Home Price Index. But the big news will be the policy announcements from the Fed Wednesday and the BoJ on Thursday.
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