Time will tell if China is the canary in the coal mine. At $4 trillion of new debt, China is set to rack up more debt in one year than the other major countries did combined at their peaks, according to Harry Dent on May 18, 2016. Investors have come to learn first-hand that the road to riches is not paved with debt. “Central banks think they can keep wishing money into existence without ever having to pay the consequences,” Dent said. He asks the rhetorical question, “When has a drug addict ever gotten over their addiction without a relapse?” More debt isn’t the prescription in my opinion for a soft landing or a nice walk in the park.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on May 20, 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.
Consumer Prices up 0.4% in April, and 1.1% over Last Year… Excluding food and energy, prices were up 0.2% last month, and 2.1% over
the same period last year.
What it means – Gasoline prices ticked higher with oil prices last month, pushing the consumer price index higher. Costs rose in most areas except apparel. But the growth rate slowed by 0.1% from the prior month, so it brings into question if inflation is strong enough to warrant a Fed hike in June.
Fed Presidents Lockhart, Williams, and Kaplan say that a June Rate Hike is Still on the Table… The minutes from the April Fed meeting also pointed to the possibility of a rate hike next month.
What it means – First-quarter GDP rose 0.5%, and April employment came up short. As noted above, retail prices are inching higher, but as we saw last week, wholesale prices remain flat. All of this explains why investors weren’t factoring in a possible rate hike in June. But obviously, Fed officials know that fabulous growth is just around the corner, so now is the time for higher rates! The speeches by the various Fed “Heads” along with the minutes from the last meeting sent the bond and equity markets lower. We’ll see if it holds.
I still don’t see the need for higher rates, but as I’ve noted all year, I expect one more rate hike just so the Fed can prove it still has power.
Real Average Hourly Earnings Down 0.1% in April, Up 1.3% over Last Year… Hourly earnings rose a bit last month, but when adjusted for inflation they gave up a little ground. For the past 12 months, real earnings made little progress.
What it means – Two steps forward, one and seven-eighths steps back. Or at least, that’s how it feels. We just can’t seem to get ahead, which explains a lot of the anxiety across the nation. It’s hard to have a bright view of the future when you have little to show for your recent past.
Housing Starts Increased 6.6% Last Month, But Dropped 1.7% over Last Year… The weakness centers on multifamily housing starts, which cooled off after years of strength. Single-family housing starts gained 4.3% over last year.
What it means – It’s not surprising that the multifamily space is slowing down. This area of the market has been on fire for years. It’s also the cheaper section of the market in terms of building costs. Single-family units take more work, and create more jobs, per home. The modest but consistent growth pace in single-family housing starts reinforces this sector's low but steady contribution to the economy.
Unfortunately, the risk in housing appears to be income. Home prices rose steadily over the past several years but incomes didn’t keep pace. The real estate market seems overdue for a rough patch.
Existing Home Sales up 1.7% in April, up 6.0% over Last Year… Prices increased 6.3% over April of last year.
What it means – Along with housing starts, existing home sales notched solid, if not exciting, gains over last year. The higher prices stand out. With real average earnings up a mere 1.3%, the jump in existing home prices puts more units out of reach for potential buyers.
It’s hard to see how young adults will jump into this market anytime soon, which puts them farther behind in starting their families and getting on the spending train that will drive our economy in the years ahead.
April Eurozone Inflation Flat, Down 0.2% over Last Year… Prices across the Eurozone remained tame last month, even as fuel prices pushed higher.
What it means – Euro area nations still face the specter of deflation. The recent report confirms that the slight tick higher in prices during March were just a blip. The latest numbers should keep the European Central Bank on track with its latest bond-buying program, driving down rates on the Continent just as the Fed threatens higher rates in the U.S.
The divergent policies should push international investors to buy U.S. bonds, keeping long U.S. interest rates low even as short rates move higher on fears of a Fed hike. As I’ve discussed for many months, I think the yield curve will go as flat as a pancake.
Japanese Ice Cream Maker Apologizes for Raising Prices by Nine Cents… Company executives bowed in apology in a recent television ad. The company raised the cost of the traditional treat from 60 yen to 70 yen. It was the first price increase in a quarter century.
What it means – It’s easy to explain higher costs. The falling yen drove up the price of imports, like the wood used for the ice cream sticks. But it’s hard to ask a nation of customers with flat or falling wages, or simply fixed incomes, to pay more.
This is great commentary on the state of mind in Japan, where deflation has been the norm for more than 25 years. An entire generation has not experienced a change in the business cycle. It’s as if the nation is stuck in an economic time warp, and not in a good way.
U.S. Government Debt Accounts for 60% of Global Government Debt with Positive Yields… Several of the 10 largest economies in the world have government debt outstanding that carries negative yields. Except for Treasury Inflation Protected Securities (TIPS), the U.S. does not.
What it means – If you want to actually get paid for your investment, and want to own debt issued by a major government, then chances are you’re shopping for U.S. Treasury bonds. This simple fact explains how the Fed can stop adding to its balance sheet and yet yields keep falling. As I’ve said before, we’re the high-yield offering in the government bond space.
In case you’re wondering, Japan has the most government debt trading at negative yields – 58%. Awesome.
Texas to Build a Gold Depository… Last year, the Texas State Legislature voted to construct a gold depository in the state where various government entities could store their bullion. Construction appears likely this fall.
What it means – In April of 2011, the University of Texas Management Company (UTIMCO) converted its gold holdings into bullion. 6,643 one-ounce bars, to be exact. Then it had to store the treasure. Right now, UTIMCO pays a bank in New York for storage. That probably wrankles the Texans. But the new depository isn’t just about gold. Any citizen will be able to open an account. However, the institution won’t make loans. This leads to speculation about a new currency based on gold. Given all the secession talk in Texas, along with their general go-it-alone attitude, who knows?
I spent a few years in Texas as a kid, and took Texas history in school. It was an independent country (1836 – 1845) before it joined the union, and is the only state to join by treaty instead of annex. In the eyes of Texans, they made a deal to become part of America, and have held up their end of the bargain. They aren’t sure the same can be said for the federal government. If things get too far out of whack, well, why not leave? Or, at least, cause quite a fuss? The new gold depository might not have anything to do with this line of thought… but it could.
Next Week – The week of May 23 includes reports on new home sales and durable goods. Fed Chair Janet Yellen speaks on Friday, but by that time most of the U.S. will already be out the door for Memorial Day weekend.
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