Morning Report – the week ahead 2/17/15

Stocks are lower this morning as Greek talks break down. Bonds and MBS are up small.

The Empire Manufacturing Index fell in Feb and came in slightly light. There is almost certainly some weather-related noise in that report.

The NAHB Housing Market Index fell to 55 in February from 57 in January. The index increased in the Northeast and fell in the Midwest. The South and West were more or less unchanged.

We have a lot of data this week with housing starts tomorrow, industrial production / capacity utilization, and finally the FOMC minutes. The minutes should be the big event for the week. The focus will be on handicapping a June rate hike.

Speaking of rate hikes, wage inflation continues to be the missing piece of the puzzle for the economy. That said, Big Labor is waking up, with refinery strikes and a longshoreman’s strike on the West Coast. Strike activity is still well below where it was in the 70s and 80s, but it could be the start of wage inflation.

One in three FHA borrowers could save money by refinancing today. Of course many will find the savings to small to make it worthwhile, but the drop in annual MIP is a big deal. Certainly MBS investors think so as Ginnie Mae TBAs continue to underperform Fannie Mae TBAs.

Finally, I appeared on Capital Markets Today and did a deep dive into the economy and housing. You can listen to the podcast here.

17 Responses

  1. Heh.


  2. NoVA/Brent/jnc:

    I had dinner with John/banned a couple of nights ago and he wanted me to let you know that he’s been banned from WaPo again (six times now), so he doubts he’ll bother to try to come back. I’ll let you know if he starts posting somewhere else (he’s also been banned from Salon for being insufficiently liberal, which is hilarious).


  3. Am listening to you right now.

    I like your pent up demand theory but hope it doesn’t dry up our [newly acquired] rental ROI. I think gasoline stays pretty low for only about 6 months. Energy production is a cobweb, not an equilibrium finder, because its all in frenetic exploration or all out sitting on production in place when the price drops. So after about six months of next to no drilling the price will spike again and then we will have a year of frenetic drilling/fracking again until the market is glutted with black gold again.

    I didn’t quite absorb your distinction between disinflation and deflation. I thought you were going to distinguish between deflation as caused by oversupply and deflation as caused by central bank collapsing the money in circulation or forcing high interest rates, but when you compared commodities to housing and I lost you.

    I do get the bond issue, I think, and we seem again to be the beneficiary of having the world’s reserve currency. We have flown along on that since WW2.


  4. Thanks, Mark… Disinflation is caused by falling commodity prices. It is generally benign economically. Deflation is caused by falling asset prices and is very painful economically.

    Disinflation was experienced in the late 90s as commodity prices fell and Chinese exports really picked up.

    Deflation is more like the Depression / Japan / Great Recession.


  5. Thanx, Brent.

    Wouldn’t a deflation in asset pricing generally be cause by either a demand collapse or the chasing of alternative assets [speculation]?


  6. deflation is primarily caused by leverage. Stock market crashes don’t generally cause deflation, but burst residential real estate bubbles often do.


  7. Thanx, again, that makes perfect sense.


  8. The Northern Europeans aren’t going to lend/give Greece more of their taxpayers’ money to fund pensions in Greece that are considerably more generous than those taxpayers themselves receive. Greece is still insisting that the austerity/reforms of their public pensions be reversed.

    I don’t see how that can fly politically.


  9. Scott – based on this Bloomberg article. I haven’t yet read “The Economist”, or the “FT”, or any other ready source of info.

    The Bloomberg article pointed to the likelihood of political instability in Greece that would lead to instability in the EU. So I am relying on that view until I read more.


    • Mark:

      Here is the Economist:

      …although it doesn’t really address the alternative of a Greek exit from the Euro. There are those, however, who think an exit would actually be a good thing for Greece.

      Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research, said Greece’s creditors needed to “face the truth” and realize the country is bankrupt and needs to undergo a devaluation in order to regain competitiveness.

      “Going to the drachma is the only possibility I believe, because then the economy will be revitalized rather quickly,” Sinn told CNBC Thursday.”We have to accept that as creditors and face the truth and reduce the burden to the Greek people,” he added. He argued that the drachma—its currency before it adopted the euro—would help stimulate the country’s economy. For example, Greece would stop importing agricultural products from other euro zone countries if it were using the drachma because they would be more expensive, Sinn said.

      “The people will go to their farmers and buy the products there, so there will be more jobs there,” he added. “Second, tourists will come back from Turkey and go to Greece.” He added that Greeks who have transferred money abroad because of fears of capital controls would be more willing to bring it back to the country and buy cheaper real estate. This would lead to a construction boom and potentially a fillip for manufacturing too, the widely respected economist argued.

      Personally, I continue to maintain what I have been saying since 1999. Europe must either have full-on political union or the Euro is destined to fail. The Greek situation is the perfect encapsulation of why I think so. Sovereign nations are perfectly free to create their own fiscal nightmare , but as long as they remain in the Euro the consequences are shared while no one has the ability to impose a solution. Greece cannot impose a devaluation of the Euro, and the rest of Europe (ie Germany) cannot impose a more sane fiscal policy onto Greece.


  10. Thanx. I would have got to it tonight, probably.


    • FWIW, while I think a Greek exit is necessary and probably desirable in the long term (they really should never have joined int he first place), I continue to be stumped by how a Grexit could be practically implemented. Greek depositors are already fleeing Greek banks to protect their assets. As the eventuality gets closer, it will only get worse.


  11. Who could secretly print up enough currency and distribute is prior to announcement? Russians?

    Also, would their posture just prior to exit look any different than now? I’d say they would want to look less belligerent if they were exiting. The fact that they are behaving in a Take It Or Leave It posture with no compromise is interesting.



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