Another week and another hurricane, this time one that devastated Puerto Rico. Everyone I know hunkered down, rode the storm out, and is safe.
Lance Gaitan, Dent Research notes, aside from natural disasters, stocks went on a tear! Yesterday was the first pullback in over a week, when the S&P 500 first closed over the 2,500 level.
The Fed decided to leave interest rates unchanged Wednesday but, as expected, also announced the start of its balance sheet reduction. The Fed will let $10 billion a month in Treasury bonds and mortgage securities mature without reinvesting the principal and then slowly increase the amount to $50 billion per month.
Fed Chair Janet Yellen also expects one more rate hike by the end of the year and three more in 2018. The news of the potential rate hikes coupled with reverse quantitative easing moved Treasury rates a little higher yesterday along with the pullback in stocks. If you are looking at anything, pay attention to earnings.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of September 22, 2017. 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.
Federal Reserve Holds Rates Steady, Outlines Path For Reducing Balance Sheet... Short-term rates remain at 1.00% to 1.25%, and next month the Fed will reinvest a little less than it receives in bond proceeds.
What it means – Well, that’s exactly what the markets expected. Rates remain steady, and the Fed will start rolling off bonds next month. The Fed’s been reinvesting all its earnings on maturing debt. But starting next month, it will reinvest $6 billion less of
U.S. Treasuries and $4 billion less of mortgage-backed bonds than what they receive in proceeds. Those amounts will ramp up every three months. The goal is to move so slowly as not to create turmoil in the markets. We’ll see.
The Fed might purchase fewer bonds, but the U.S. government still has to issue them, which means someone, somewhere, hasto buy more. Maybe interest rates have to rise to attract more buyers. Maybe not. We’ve never been here before, so no one knows what will happen. But one thing’s for sure, the Fed will be parsing economic data very closely in the months ahead.
If the bankers see weakness, expect them to ditch the anticipated rate hike in December, and potentially slow down or even stop shrinking their balance sheet. They remain, as they say, data driven.
One note of caution: Every time the Fed has ended quantitative easing, the markets rolled over. Think June 2010, or the summer of 2011. When investors finally digest the end of easy money, they tend to get nervous.
Existing Home Sales Dip 1.7% in August... Hurricane Harvey weighed on the normally active Southern region. Single-family sales fell 2.1% and multifamily homes dropped 1.7%.
What it means – There’s no doubt Hurricane Harvey brought real estate to a standstill in the Houston area, affecting overall existing home sales. But it’s not like sales were flying in the previous months. For the year, existing home sales are barely positive at 0.2%. Even with slow sales growth, prices are holding strong, up 5.6% over last year.
Considering we now have to deal with the aftermath of Hurricane Irma in Florida, I don’t expect the numbers to be dramatically different for September.
Housing Starts Slightly Off, Down From 1.19 Million to 1.18 Million... As with existing home sales, housing starts took a hit from Hurricane Harvey.
What it means – Starts dipped 7.9% in the South, which make sense because Houston is the largest new home market in the country. The big question is, what comes next? Contractors who had a hard time gathering crews in mid-August will find it almost impossible now. The name of the game in the area today is renovation and rehab, not building new. But eventually we’ll get back to normal.
I think we’ll see a drop in housing starts and new home sales in the fourth quarter, but then a nice rebound in early 2018 as the markets catch up.
Finnish Live Births Fall to Lowest Level Since 1868... Births fell for the sixth consecutive year in 2016.
What it means – The numbers are worse than they appear. In the 1860s, there were roughly 1.7 million Finns. Today, there are 5.5 million. The low birth rate, compared to the population, is the lowest on record. The Northern European nation has a robust socialist system that provides generously for childcare and health services. Citizens are simply choosing not to have kids, which is worrisome.
Without children, there’s no one to pay the taxes in the years ahead to keep the benefits flowing. As Japan, South Korea, and a host of other countries have proven over the years, there’s no good way to motivate people to have kids.
Catalonian Officials Arrested Before Secession Vote... Leaders of the Spanish region were detained for their role in organizing the vote, to be held on October 1.
What it means – Catalonians have been agitating for years to separate from Spain. Constituents of the wealthy region think they got a raw deal during the financial crisis, having to foot the bill to support the rest of the country. It’s entirely possible they are right.
Regional leaders scheduled a non-binding referendum on the issue, but the national government’s not onboard. Spanish leaders specifically voted against the region’s ability to separate, or even hold the vote. It’s likely that arresting regional leaders will simply spur on the separatists.
If the Calatonians hold the vote, and separation wins, it will cause uncertainty even though the decision is not binding. Just as with Brexit, questions about the movement of capital, goods, and people will fill the air.
States Will List Retiree Healthcare Costs in Budgets, Current Deficit is $645 Billion... Accounting standards encourage states to list their retiree healthcare liabilities within their budgets instead of in the footnotes.
What it means – Finally. I’ve been shouting about this for 11 years. While the financial world focuses on pension funding from time to time, we rarely discuss healthcare costs.
Today, states have set aside just 7% of what they need to pay healthcare benefits for their retirees. Instead, they simply pay the expense out of the operating budget. This would be fine, except those costs are shooting higher. If you ask state officials why they don’t save up to pay for these costs, they’ll tell you they don’t have to because, unlike pensions, they can change healthcare benefits at any time. I can’t imagine that gives current and future retirees any comfort. Expect government budgets to stretch even further in the years ahead as more Boomers retire.
Student Loans Delay Millennial Home Buying Up to Seven Years... 83% of respondents to a National Association of Realtors’ survey cited student debt as the reason they have not purchased a home.
What it means – Student debt has exploded in recent years, so more people have sizeable debt early in life. But at the same time, homebuilding costs have also jumped, and median income is growing slowly at best.
Is this a debt issue, a cost issue, or an income issue? I think it’s all three, and the combination of factors won’t change in the near future. Housing will most likely remain a small part of GDP for years.
Miami-Dade County Officials Issued Building Code Violations in the Hours After Hurricane Irma... Residents trying to secure their valuables and pick personal treasures out of rubble were met with county officials who cited them for unsafe buildings and unsecure pools.
What it means – It’s hard not to be cynical about such a thing, as if the code enforcement officers are heartless, mindless bureaucrats with no sense of the world around them. But I wonder if it the situation is more nuanced than that.
Instead of a comment on how the county operates, it could be a comment on how our nation runs. What if the county is simply trying to head off potential litigation? I can see the headlines now – neighborhood child dies in unsecured pool, family blames the city. I can’t decide which line of reasoning is more depressing, mindless bureaucrats or litigious society.
Swiss Find Cause of Sewer Backup – 100,000 Euros Flushed Down Toilets... Utility workers found hundreds of cutup 500-euro notes stuffed down the toilets of a bank and three nearby restaurants.
What it means – This gives new meaning to the phrase, “You might as well be flushing money down the toilet.” Authorities found the culprits, two Spanish women. They admitted to flushing the currency, and paid for repairs to the plumbing in the restaurants.
So far, they aren’t facing charges because there’s no law against what they did. Even if the Swiss had a law against destroying currency, it probably wouldn’t apply. The Swiss don’t use the euro, they use the Swiss franc. The women gave no reason for their actions, so we’re left to wonder what could have led them to destroy so much capital instead of simply giving it away.
Next Week – The last week of September brings reports on durable goods, new home sales, and the latest CoreLogic S&P Case-Shiller Home Price Index update.
The proof is in the planning.
200 N. Westlake Blvd., Suite 109
Westlake Village, California 91362-3783
805.495.2077 800.266.2077 888.WHY.BEPOOR
The information presented here has been provided by HS Dent. HS Dent is an economic research company that uses various techniques to study the potential impact of various changes in demographic trends in our economy. No one person or strategy can accurately predict market
movements. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be place on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
The opinions in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
Indices are unmanaged measures of market condition. It is not possible to invest directly into an index. Past performance is no guarantee of future results. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Government bonds and treasury bills are guaranteed by the U.S. Government and, if held to maturity, all bonds offer both a fixed rate of return and fixed principal value.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.