Morning Report: Why the Fed is consistently high on its growth estimates 9/16/15

Stocks are flat this morning as the FOMC begins their two day meeting. Bonds and MBS are up small after getting whacked yesterday.

Mortgage applications fell 7% last week, as purchases fell 4.2% and refis fell 9.1%.

The NAHB Homebuilder index hit a post-recession record of 62 – the highest since October 2005.

The consumer price index fell 0.1% month-over-month as the strong dollar hurts commodity prices. Ex-food and energy, prices were up 0.1% month-over-month and 1.8% year-over-year. That is close to the Fed’s target, however they prefer to use the personal consumption expenditures data, which uses a different balance of goods to calcluate it.

Real average weekly earnings rose 2.3% last week.

When the FOMC releases their decision tomorrow, they will include their economic forecasts. For this entire recovery, the Fed’s estimates of future growth have been consistently high. IMO, the reason for this comes from the fact that the Fed’s models are largely based on prior experience which has been  Fed-driven inventory-based recessions since WWII. In these cases, inflation increases -> the Fed raises rates -> the economy slows ->  inventory builds up -> people get laid off -> a recession begins -> the inventory gets sold -> new production starts up -> workers get re-hired -> the economy recovers. These recessions are typically short and the recoveries tend to be V-shaped. This recession is  different because it wasn’t driven by the Fed raising rates and inventory buildup, it was driven by a bursting asset bubble. The issue with these  recessions is  that the problem isn’t excess inventory – it is bad debt and mal-investments. And these are typically longer and deeper recessions, with longer and shallower recoveries. Instead of  a V-shaped  recovery, you get a bathtub-shaped recovery. The economy recovers once the bad debt and bad assets are liquidated, which takes longer.

This leads into the latest negative equity report by CoreLogic. 10.9% of all homes with a mortgage (or about 5.4 million homes) have negative equity. 9 million (or about 18%) have a small amount of equity. 800k homes with negative equity would become equity positive if house prices increase 5%. Note that many of these properties may never sell (abandoned homes in rust-belt cities for example) so the effect on the real estate market will probably be muted. But that is one of the reasons why the inventory of existing homes for sale is so small. Negative equity has a drag on the economy be preventing workers from moving to where the jobs are because they cannot sell their house without a ding on their credit ratings. Just another example of the mal-investments that hold back the economy. The economy will accelerate as these mal-investments are liquidated and borrowers and creditors move on.

25 Responses

  1. One beer company, indivisible.

    “Anheuser-Busch InBev Approaches SABMiller on Possible Takeover

    By CHAD BRAY and JAMES KANTER
    SEPT. 16, 2015”

    http://www.nytimes.com/2015/09/17/business/dealbook/anheuser-busch-inbev-takeover-sabmiller.html?_r=0

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  2. I see all sorts of antitrust problems with this one…

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  3. meh. let the proles have their crappy light lagers.

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  4. well, i accomplished something today. irritated the hell out of Liam at the PL.

    [marks “good day” on the calendar]

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  5. Liam is annoyed that there are those that exist that disagree with him even on the most trivial issue. He is second only to Cao in intolerance. Bernie is third and Shrink fourth.

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  6. Like I said, mentioning that you have personally met Schumer was a great way to twist the knife.

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  7. Are the Jooooooo’s pissing him off more than usual or is it old people who won’t die already and using up Medicare, unlike him.

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  8. I still think I win, though, as Chris/Cao has declared that I, and not any of you conservatives, have ruined the PL.

    *buffs fingernails*

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    • I don’t know. I think a death wish beats that hands down.

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      • Hyper liberal Matt Damon inadvertently admits that using diversity as a selection criteria comes at the expense of merit. “It seems like you would undermine what the competition is supposed to be about, which is about giving somebody this job based entirely on merit.”

        Queue up the progressive cannibals as the left eats its own.

        http://ace.mu.nu/archives/359021.php

        BTW, the reaction of the black woman is fantastic when Damon tells her “When we’re talking about diversity, you do it in the casting of the film, not the casting of the show.” (I don’t even know what he means.) You’d think he just told her he thought slavery was a fantastic idea.

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        • I’ve mentioned before that I generally can’t stand these candidate “debates”, but I haven’t seen much of Carly Fiorina and I wanted to get a sense of what she is like, so I tuned in to about 40 minutes of tonight’s “debate”. What an absolutely transparent effort by CNN to make it the Donald Trump show. Every single question I saw asked – quite literally every single one – was framed within the context of Donald Trump.

          “It was reported that Donald Trump say X about you. Would you like to respond?”

          “You have criticized Trump on immigration. Why is he wrong?”

          “Trump has said he would tax hedge fund guys. Do you agree with that?”

          And then, of course, the screen is split between the person giving the answer and Donald Trump so that we can see his reaction. And because the question was framed in the context of Trump, he is always given an opportunity to respond to the answer given by the other candidate. I watched for 40 minutes and Trump’s face was on screen for at least two-thirds of the time, and he was talking probably 40% of the time. It is transparently designed to be entertainment with Trump as the star rather than as a legitimate debate aimed at informing voters. CNN’s promotion of Trump was completely shameless. The “moderators”, if they had any self-respect as journalists, ought to be totally ashamed of themselves for participating in this charade.

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  9. Trump puts asses in the seats and viewers tuned in, if it strays to far or to long from Trump ratings collapse.

    It’s about entertainment and Trump is an entertainer. Can you think of another Republican, one who is revered, that spent the bulk of their life as an entertainer before entering politics? I can.

    And face it, Trump is compelling to watch, I don’t find him any more contemptible than anyone on that stage. I find him to be a good deal less so than most on the stage. I HATE debates but am watching because of Trump, he’s a riot.

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    • Yes, it is apparent that it is all about entertainment. But frankly I don’t find Trump to be entertaining or compelling or even interesting in any way at all. I turned it off primarily because it was the Donald Trump Show and I have zero interest in watching such a show. If you had asked me beforehand if these “debates” could be any less worthwhile than they have been in the past, I would have said that it isn’t possible. But CNN managed to do it.

      I will say that the nature of the show gave some candidate the opportunity to rip into the moderators for being so unserious and trivial, but unfortunately none of them had the smarts to grab it. At least while I was watching.

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  10. Trump got two doctors, one a preeminent pediatric neurosurgeon to agree with him on vaccines. Wow.

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  11. I thought Jeb was awful and Kasich insufferable. Fiorina sounded passionate re PP but I just don’t care about it. Cruz I thought was good, Rubio was over polished and Trump was Trump.

    I don’t really give a shit about the rest.

    Interesting that Trump’s success has been in large part due to his immigration stance and no one else will pick it up and run with it.

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  12. I’ll give a glass half-full take on Trump. Yes, he is obnoxious and woefully out of his depth with respect to FP knowledge. Overall, he hurts more than helps.

    That said.

    the millennial generation’s only real political interaction with Republicans has been via the lens of John Stewart, Steven Colbert, Michael Moore and the left wing media. They don’t watch Meet The Press. Trump’s presence probably draws a number of them just out of curiosity to see if anything wild happens. This may be the first time in their lives they have heard conservative arguments argued in fact by conservatives. It is an opportunity.

    Second, this is the only opportunity any of them will have to show some balls. Once hillary has the nom, the media will treat any heated moment with the #WarOnWomen narrative. .

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  13. Jeb admitting he smoked pot was great as well. Time to let that little political litmus test go by the wayside…

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    • Nearly half of all the questions asked by the CNN moderators referenced Trump in some way.

      http://www.foxnews.com/opinion/2015/09/17/trump-debate-forty-four-percent-cnn-debate-questions-focus-on-donald.html

      Brent, you mentioned that the debate gave candidates a chance to show some balls. I agree, and the biggest chance it gave them was to upbraid Tapper and CNN (and by implication the media in general) for its unserious approach to the Republican field and its transparent attempt to make Trump the centerpiece. Unfortunately none of them took it up.

      I thought Fiorina’s answer to Tapper’s question (actually it wasn’t even an actual question, which is telling in itself) about Trump’s “look at that face” comment was in fact pretty good, being succinct, to the point, and demonstrated quick thinking. But imagine if instead (or even in addition) she had said “I thought this was a presidential debate, not a grade school snipe session. What kind of “question” is that? We have the lowest labor participation rate in nearly 40 years, an economy that is barely growing, a struggling middle class, record numbers of people getting government handouts, Islamic terrorists running rampant in the middle east, a foreign policy in complete disarray, dwindling respect for what little American leadership this administration is willing to show in the world, and you want me to comment on some clownish insult about my looks? Diminishing the candidates by turning this into a personal slingfest may be good for CNN’s ratings and, frankly, good for the Democrats, but this debate should be about Republican voters, and indeed the American people, hearing what I and each of my fellow candidates has to say about the serious issues facing this country. Come on, Jake, let’s take tonight seriously and stop trying to make this a Donald Trump reality show.”

      I don’t know how attacking the media would play outside the Republican party, but I’d bet anything that most Republican voters, who hate the mainstream media, would have eaten it up.

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  14. Really interesting.

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  15. Scott, attacking the media is a good strategy as they are ranked just above Congress in popularity.

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  16. @ScottC1: “What an absolutely transparent effort by CNN to make it the Donald Trump show.”

    I am shocked to find CNN pandering for ratings. Shocked, I tell you.

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    • KW:

      I am shocked to find CNN pandering for ratings.

      I actually was shocked at how transparently obvious it was. I haven’t watched CNN regularly in years (and even then it was CNN International), so maybe it is pretty standard there, but usually news outfits try to veil themselves (disingenuous as it may be) with at least some level of concern about the journalistic craft over mere ratings. Last night was ridiculous, at least the portion I watched.

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  17. @Scottc1: “BTW, the reaction of the black woman is fantastic when Damon tells her “When we’re talking about diversity, you do it in the casting of the film, not the casting of the show.” (I don’t even know what he means.) You’d think he just told her he thought slavery was a fantastic idea.”

    He meant you demonstrate diversity in casting the film, and that you don’t go into casting with gender or racial stereotypes, but again, shouldn’t the same logic apply? You cast the best performer, period. But, yes, there are certain people who think they idea that you would select based on who produced the best product rather than on who was most ethnically diverse is insane.

    That being said, the guy they picked, while having produced the best sample piece, had lots of red flags. He doesn’t like broad comedies, doesn’t like the script he’s supposed to direct, doesn’t like the writer they hired to work on it, broadcast in the interview process that he’s going to be difficult to work with . . . I would have picked the woman and the Vietnamese dude. Or the other dude who was close, and clearly more in tune with the Farelly brother’s sensibilities.

    Like

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