Friday, February 28, 2014

Limitless - US Federal Debt

Are politicians racking up debt that your children will have to pay?
photo image of a toddlers holding a pink pen with hundred dollars in the background.
National Debt is Silly!
Anyone who has visited my Blog has probably noted the US Debt counter on the right side of the main page. To me, national debt is a serious issue.
While my biggest concern has to do with what's done with the money borrowed, the overall amount is also hard to ignore.
Whether we pay the money through loosing buying power due to inflation or through income confiscation (taxes), the amount we owe is so large that there is just no way for our present generation to pay for it. As a result, it will be our children who are left with the bill.
But in every family, there is someone who just does not understand the problem of spending. Most of them see government as a kind of deity (God) who has the power to create money from thin air. What they miss is that the problem is not about the creation of the money but the creation of value.
image of the Empire Estate Building.
To pay a trillion in debt to the
Chinese, we need about
1,500 Empire Estate Buildings
For example, if the Chinese lend us a trillion dollars, we will have to give them a document that promises we will pay in ten years. Such document is a 10 year treasury bond. Well, in ten years, the Chinese will come back to get paid. But we will have to give them something of value. They will want to trade their bond for corn, cars or famous buildings. Of course that they will be fine with first receiving cash that they can then exchange for the Empire Estate Building and a few other landmarks. But what do you think will happen if the money we give them is not good? They will certainly refuse to accept dollars and would rather get paid with the buildings directly. After all, the money they lend us has value when we borrow it. They expect the same in return.
This is exactly what happened with German money after the first World War. The country was broke and as a result their money was worthless, So, the rest of Europe demanded to get paid with gold and other valuables.
Now think. Would you like the US government to come to your house in ten years and tell you that you have just lost your house to the Chinese as payment for the money Uncle Sam borrowed ten years before? What if they tell you that your house is exactly your fair portion of the total amount owed? Would such fairness make you feel any better? Do you think that it is fair for the Chinese not to get paid instead?
But you may be thinking that the government just prints money that the Chinese can then use to buy whatever they want. But the question is: if the government can just print money out of thin air, why did it had to borrow in the first place? The answer is because they can print money but not value. To pay the Chinese back, Uncle Sam will have to take your money or your goods. It is as simple as that.
If we are a nation that does things right, we need to have a good plan on how we will pay for what we spend before we use the money.
image of the chart illustrating US debt during the 20th century.
President Obama, in his attempts to take advantage of the public's ignorance, claims that we should raise the debt limit because we should pay what we owe. With this, Obama uses the high moral ground as his argument without explaining how money payments really work. By the time he is done, Obama will double the debt accumulated by all US Presidents combined.
It's not about not wanting to pay. The US has the best credit in the world because we do pay. Instead, it's about making sure we don't default. The best way to prevent default is to spend within our means. Unfortunately, this is at the core of our incompetence. We just can't do it. We love to talk about spending money for fireman and teachers even when it isn't our money we are giving away.
To see how ridiculous this situation is, look at this video.
Rather than making things complex by using national debt, the video simplifies things by putting everything within the context of family in debt. Make sure to share the article with anyone who needs to understand the topic better. Let's be more responsible. Enjoy!

Thursday, February 27, 2014

Jobs or no Jobs

image of an educated professional holding a jobless cardboard sign.
Photo by
In what seems like a repeat of 2007, macro-indicators continue to soften. Just like in 2007, the reasons behind the shift abound. But if history rhymes, we may be witnessing the next cyclical downturn.
Today, the Jobless Claims report surprised experts with a 348,000 claims headline. Before to the announcement, the expected range was between 330,000 and 345,000. The prior report was adjusted down 2,000 to 334,000; thus making the current report a substantial increase.
Since the report is volatile in nature, it is always best to use a moving average when looking at the data.
So when could we expect confirmation of a failed recovery in jobs? Cycle theory advocates concur that any time in 2014. Their idea is that markets oscillate in a fairly periodic basis and that it is now time for the next swing lower.
Demographers generally agree. Demographers look at the effect that Baby-boomers have on the overall economy.
Just remember that these are not sharp points on a graph but rather a slow turning curve. So, keep an eye on the broad trends.
Look at this morning's Jobless Claims chart.
New Jobless Claims chart with 4 week moving average made with data from Haver Analytics.
Jobless Claims data by Haver Analytics
Today, new data continued to build on a trend that started during the third quarter of last year. If the bad weather argument holds, the 4 week moving average (the cyan line) will soon correct down.
But if the thesis fails, we should be challenging the top end of the larger trend, which is marked by the channel I drew over the chart. There is a strong chance that in about seven to eight weeks we will test the channel's integrity with the 4 week moving average line. The target is near 350,000 claims.
As we approach the upper channel band, the chart may display a bit of volatility (noise). But soon after, we will know the outcome.
Even if the resulting trend moves sideways at a 350,000 level after breaking above the channel, it would still be a confirmation that the so called recovery in jobs failed.
Why is employment important? Well, because the consumer is a massive portion of the US economy.
Yes, I am geeking out with the technical chart analysis this morning.

02-27-2014 10:14 AM Update:
Consumer Electronics expert Barry Vogel made a very relevant comment in my LinkedIn page:

To my way of thinking, the jobless reports and related reports are a meaningless exercise. When the vast majority of jobs created are minimum wage or near minimum replacing solid middle class jobs, the numbers are meaningless. When people are forced out of the workforce before they wish to retire, the numbers are worthless. When formerly hard working people have given up after failing to find meaningful employment after more than a year, the numbers are an insult. To your point, the economy is far more fragile than anyone cares to admit. I do not believe that we have recovered. The economy could not stand on its own without being propped up by government spending. We are just one major financial blow away from disaster at any time.

This was my response:

You are very correct Barry. 
The Unemployment report, which is reported separately, fails to include (1) people with expired benefits and (2) those with part time jobs who would rather have full time employment. But if today's Jobless Claims report increase, as it is now evident, then things would be worse than you have clearly noted. It's a bit of bad on top of bad. 

Thanks for the great insight.

Wednesday, February 19, 2014

US Builders; Anything But Confident

Like when discovering that Santa doesn't really bring toys to children around the world, economists everywhere fell off their chairs after receiving Builder Confidence Data this morning.
illustration of a small home
Negative NAHB Builder Sentiment
Today, the National Association of Home Builders' Housing Market Index shocked the world of academia by revealing a negative confidence level among US builders. Considering that any number below 50 is bad news, last month's 56 was pretty OK; especially now that we convinced ourselves that mediocrity is the new recovery normal. Experts anticipated a number between 54 and 58. Now imagine their surprise when the news of an silly 46 hit the wire.
Naturally, the immediate reaction was to blame the weather. And why not? Everybody is blaming the weather.
aerial photo of the hoover dam
US builders aren't sissies
But if I know something about builder greed is that it is stronger than the weather. Think of all the great construction feats that took place in this country over the last couple of centuries. From trains to bridges, builders are anything but sissies.
Does this mean that something else may be at fault? Well, how about Greed's balancing partner: Fear?
Back on May of last year, I covered the real estate market in an article called Robust Real Estate Hides Truth. There, I described the fundamental issues challenging the industry. But lets bring everybody up to date on those issues.
Last year, homes were being sold too cheaply for builders to want to compete. This is because, after inflation, it was more expensive to build a house than to buy one built ten years ago. This is especially true when investors where the main market buyers. Remember that investors buy wholesale. The retail consumer had no chance to compete because homes were being appraised about 15% below the asking price while bids were being made 10% above ask. This meant that only buyers with a 20% to 30% of extra cash at hand could play the bidding game.
logo in black background of FHA logo with "Your door to homeownership" legend
FHA buyers were out of luck last year
Then consider the fact that this was an environment where the banking system failed to fully come back as a source of real estate loans. Even today, builders are complaining about the difficulty to get their projects funded. Just think of little home buyers. Now completely forget about FHA buyers. Low appraisals take most of them totally out of the market. I am sure that you heard stories about people spending up to a year trying to buy a house. These poor souls were being outbid by pro's.
Most homes were being sold to investment managers like BlackRock, rather than families. The interesting part is that this was no secret. Recently, BlackRock unveiled bonds made up from billions of dollars of securitized trounces of homes bought specifically to be rented. It should be clear that any home price increases were due to the vicious fight for inventory being waged between various investment managers.
Now put yourself in the shoes of builders. Imagine a market where capital is either too expensive or impossible to get. Add the fact that market prices for the goods you make are much lower than your cost to manufacture them. Then, consider that your main customer has yet to find reliable loan sources. Finally, think of the fact that the next generation of potential home buyers prefers to live at home with their parents.
All things being considered, there is simply no reason why builders should be upbeat.
Thankfully, they have enough sense as to not blame the weather. But the same can't be said about economists who insist that the weather is behind the malaise we are now seeing across the economy. From government to academia, naive optimism about a recovering real estate market abounded despite the evidence.
photo of three large snow plowers clearing a highway after heavy snow
Don't blame the weather
In Robust Real Estate Hides Truth I described how the so called recovery lacked fundamental strength. The fact that a part-timer like myself can analyse the same data as the pro's and come to diverging conclusions isn't surprising. What's incredible is when the pro's see their models crashing back to earth after such a short time.
This is why I have a hard time thinking of economics as a science. Pseudo-scientists like economists are great at curve-fitting until they see what they want from charts. Real scientists would be glad to be surprised by the evidence rather than by the failure of their fully developed models.
Illustration of "Fear to Greed" gauge showing that fear is stronger
Fear is stronger in this market
In a nutshell, this morning's news should have surprised no one. The home market is out of inventory and those who make the widgets have no incentive to make any more. These are the distortions typical when ineptitude is rampant among those who control the economic levers. So far, housing and employment have demonstrated the degree of market distortion and dysfunction that is our present reality. This despite a clueless president who continues to brag about his brand of recovery.
For now, keep walking people. There are no new news here!

2014/02/19 9:06 AM Update
Housing Starts and New Housing Permits data collapse in January. 
From an expected 975,000 in New Housing Permits, the final number came in at a meager 937,000 for a 5.4% in month-to-month decline. 
New Home Starts did worse. From the anticipated 950,000, the real number dropped by 16% when compared to last month to 880,000.
Despite the now normal tendency to blame the weather, the West may tell a different story. The West fell by 26% in a Permits month-over-month comparison and by 17.4% in month-to-month New Home Starts. The West is the second largest component in the survey and was not affected by the weather. 
Whether this is a fluke or a fundamental indicator of a weak economy, time will tell. To me, this has an eerie resemblance to April, 2006. Despite clear fundamental flaws, the data had just begun to show housing weakness. Back then, it took two years for everyone to finally admit we had a problem. 
In 2006, the problem was irrational exuberance; too much of a good time. Today, the issue is incompetent malaise driven by a White House leadership that insists in maltreating capital and business; thus creating a level of uncertainty that can't be lifted by all the money pumping at the Fed and through the Japanese carry-trade industry.

Wednesday, February 12, 2014

Is the Venezuelan Circus our own Show

What's happening to Venezuela? Is democracy failing them or is it totally absent?
photo image of clashes between Venezuelan civilians and army soldiers
I agree with the contemporary idea that democracy is not for everyone; especially democracy the way Americans define it. History shows plenty of communities where democratic levels were weak, yet progress abounded. Just look at China today.
Also consider the fact that a high degree of democracy in a nation of ignorance will lead to great consensus but definite failure.
Thus, I feel that Venezuela's problems did not arise from its democratic level. But, while democracy isn't for all, food surely is. The real shame of the Venezuelan regime is that it has turned one of the best economies in Latin America into a circus. Whether suffering from a shortage of toilet paper or milk, whether today or fifty years ago, these regimes have yet to learn that central planning by bureaucrats never succeeds.
The worst that could happen now is for oil to drop in price. The country would then have to borrow more from a market already reluctant to buy their bonds. But such is the luck of oil economies.
Income from high oil prices made Chavez' economic incompetence look like brilliance. When the price of oil is high, the leader in place looks like a hero. When oil goes down, the boss gets excommunicated.
The only constant is the dependency on high oil prices and the cyclicality of the pain. If only these so called leaders would help the economy diversify while things are cyclically great, the result would be the opposite. Instead, they opt to spend surplus funds on things that keep them in power; things that do not improve national productivity.
American's are very familiar with the problem. Borrowing money from the Chinese to acquire Wal-Mart stuff to fill their closets is wasteful. Buying Wal-Mart stuff results in the accumulation of things that nobody wants to buy from us. We become the end of the chain.
image of a calculator, a pen and a few quarters placed over a business chartThe inverse took place during the fifties when any money borrowed went into business spending. Investing in businesses created things that others value. We were then an important part of the chain.
The formula is simple. Opt for saving rather than buying personal things; meanwhile invest aggressively in business for maximum results. While this article begins with a question about the source of Venezuela's difficulties, it is evident that the problems of Venezuela can easily replicate elsewhere; including the US. The only thing helping America is the fact that it is already diversified. Unlike Venezuela, the US has plenty of vibrant industries that have succeeded with or without government intervention. The problem for us is that, like Venezuela, our leadership is focused on the kind of entitlement spending that doesn't lead to the creation of things that others would want to buy. How does a union change whether others want to buy things from us or not? How effective is paying irresponsible teachers a higher wage when it comes to making our products more desirable? In either case the benefit is for either the unions or the irresponsible teachers only. They add zero value to our marketable products. In America, we are forgetting to curve personal spending and to invest in business first.
While I am not optimistic that Venezuela will recover any time soon, I am hopeful that we do. I would love to see us prioritize business investing once again.

Saturday, February 8, 2014

Credit Card Debt Up - Boomer Jobs Down

Image of multiple credit cards over a flat surface
There is a consumer borrowing
party going on
Is the consumer-borrowing party getting louder out of happiness or desperation?
Today, the Federal Reserve reported that consumer borrowing took a surprisingly large jump of $18.8 billion in December to $3.1 trillion for the year.
Some argue that this is due to the Christmas season. Others claim that it is a good sign that the economy is improving. Both are wrong.
I will remind those who think that the jump is due to Christmas of the fact that 2012 also had one of those. The total last year was $2.9 trillion compared with the $3.1 trillion for 2013. So the substantial increase was not due to the holidays.
With regards to higher borrowing being a sign of confidence, I would say that it is possible but improbable. While spending could be a sign of consumer confidence, I would instead expect to find the initial signs of confidence among employers. But so far I see none.
Chart of Nonfarm Productivity and Unit Labor Costs by Haver Analytics for February 6, 2014
Nonfarm Productivity and Unit Labor Costs
 by Haver Analytics 
Employers hire employees when the balance between greed and fear tilts towards greed. Unfortunately, employers are acting with a bias towards fear. Fear makes them behave controlled and measured. On the other hand, greed creates stampedes. Fear drives efficiency up. Greed drives it down. The efficiency report from this week clearly showed that efficiency is way up. Productivity went up while unit of labor cost went down. Less input to more output equals higher efficiency. Again, this behavior is rather typical of fear periods.
The signs clearly point at a consumer who is using more credit cards not out of optimism but rather out of need. Consumers are rebuilding leverage again, but absent an economic boom this time. People are borrowing the money they don't have. If this assumption is correct, in a few months we will see unsecured-loan defaults rising. So be prepared just in case I am right and the extra spending isn't due to a better economy. In your shoes, I would not hold my breath.
I only wonder what it would take for people to remove the blinders. In 2006 I told anyone who would listen to skip buying a house. I told them all to sell their home instead and to rent one in the mean time. People thought it was a stupid idea.
Today, I see the same about the ineptitude of this White House. Here, Congress is not an excuse because they have always been trouble for any president. The variable this time is a president who has no clue of the social aspects of markets. He either does not understand what makes economies work or refuses to do the right thing. He is either incompetent or unethical; you chose. The fact is that there are not enough jobs being created. We need about 400K new jobs per month instead of the joke of a number we are getting.
The only reason for the low unemployment is the low participation. But here, the President argues that the low participation is due to Baby-boomers not seeking jobs. But this too does not match reality.
image of baby boomer making a deal
If boomers were no longer looking for jobs, there would be an excess of job openings in the jobs they previously held; jobs as managers and sales people. Instead, the lack of employee supply is for welding positions. These were not the jobs that most Baby-boomers had. They were insurance agents, traveling reps, real estate agents. Unfortunately, the real supply imbalance in these areas is one where there are not enough of these jobs for the many job seekers fighting for them. I recently saw a job listing for COO where more than 150 people applied for the one job. What? 150 Chief Operating Officers for just one job? This directly contradicts the assumption that jobs for the educated are plentiful. As someone commented in CNBC today, unemployment for those with college degrees remains about 4% higher than before the recession. So much for that spin.
In simple terms, the government's claim is just hiding the truth from naive citizens. I say naive because it seems clear to me that they wrongly elected the President because he sounded well while delivering empty speeches. If I had anyone of them read the speeches rather than hear Obama say them, they would think very differently of the message. So, let's just hope that this President does not take us so far into the hole that we can't recover later on.
image of several chinese yuan bills over an american 100 dollar bill
As for the risk at hand, keep in mind that we already owe more money than any other country in the history of the planet. In a nutshell, your taxes (assuming you pay any) fall way short of what government spends. For every dollar in taxes, we ask the Chinese for 60% in extra loans. Soon they too will realize we just don't have any money.
The facts continue to contradict the White House's spin. While they can attempt to impress us with the best displays of curve-fitting by Nobel Prize economists, the fundamental reality continues to call attention to the fact that consumers are being squeezed, boomers are out of their jobs and employers are scared. Let's demand better leadership.