Morning Report: The Fed acknowledges risks to the global economy 1/28/16

Markets are flattish after the Fed maintained interest rate levels. Bonds and MBS are flat.

The statement out of the FOMC was relatively dovish, and the key sentence was: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Stocks initially rallied on the statement and then sold off into the close. Bonds rallied.

Initial Jobless Claims fell from 294k to 278k last week.

Durable Goods orders fell by 5.1%, much more than the Street expectation of -0.7%. Capital Goods orders ex defense / air, a proxy for business capital expenditures, fell 4.3%.

Pending Home Sales rose 0.1% in December and are up 3.1% YOY.

The Kansas City Fed index was unchanged at -9.

Homebuilder PulteGroup reported better than expected earnings this morning. Orders were up 13%, and backlog increased 26%. ASPs increased 6% to $353k. CEO Richard Dugas had this to say about the state of the housing market: “While heightened global economic concerns have created greater market volatility, the positive trends in jobs, demographics and household formations, along with low interest rates and limited housing inventory, support expectations that housing demand continues to move higher at a measured pace for a number of years.” They are seeing weakness in Texas, although Dallas seems to be immune to the drop in energy prices, at least for now.

The CBO estimates that wage growth will outstrip home price appreciation in 2016. They are predicting 3.3% wage inflation and 2.4% home price appreciation. Given the tight inventory levels, I think that home price appreciation estimate is low. Wage inflation has recently crept up from 2% to 2.5%, but I don’t see the catalyst for further wage inflation given the huge reservoir of people who left the labor force for statistical purposes but would gladly take a job if they found one.

38 Responses

  1. “but I don’t see the catalyst for further wage inflation given the huge reservoir of people who left the labor force for statistical purposes but would gladly take a job if they found one.”

    Could it potentially be people in lower-paying jobs with higher-paying skill sets moving into newly created higher-paying jobs? That’s about the only thing I could see, an increase is higher paying gigs. Which I’m not anticipating, because I have no idea. 😉

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    • There are a lot of underemployed people still out there.

      My anecdote for this is a guy a year younger than me who lost his gummint contractor managerial job in 2007 and has been an hourly Starbucks barista since. Some weeks he only gets scheduled for 15 hours. He would jump at any sort of desk job.

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  2. A couple of things dovetailing with recent discussions here on Flint:

    The problem is not just lead solder, but actual lead pipes, and apparently no shortage of them, especially in older areas.

    http://www.nbcnews.com/storyline/flint-water-crisis/what-emergency-lead-pipes-not-being-removed-flint-n504491

    Flint’s utilities manager, Mike Glasgow, said the city estimates there are 15,000 to 20,000 service lines that contain lead.

    He doesn’t have a firm figure because those records are mainly kept on index cards in a filing cabinet — many written in pencil decades ago, some with incomplete details. The city is in the process of digitizing the records.

    The City of Flint’s records of which water lines contain lead are mainly kept on these index cards, which officials have been trying to digitize. Hannah Rappleye
    The problematic pipes include not just the old lead lines, but galvanized iron pipes in the home that soaked up lead in the water system over many years, and copper pipes installed in homes before 1987 that likely contain lead solder.

    https://www.bostonglobe.com/news/nation/2016/01/27/new-lawsuit-seeks-replacement-flint-lead-pipes/a9sKERRfVdLjTmRSno8G3J/story.html

    More:

    ‘‘The only way to permanently and completely fix the problem of lead in drinking water is to conduct the full replacement of the lead-containing pipes and solder in a water system,’’ said Sarah Tallman, a lawyer with the Natural Resources Defense Council. The group filed the complaint on behalf of citizens along with the American Civil Liberties Union of Michigan, the Concerned Pastors for Social Action and Melissa Mays, a Flint resident.

    A more general overview of the Flint water problem:

    http://fivethirtyeight.com/features/what-went-wrong-in-flint-water-crisis-michigan/

    Which tends to reinforce, indirectly, my contention that the left’s general focus on Rick Snyder is wrongheaded and counterproductive. The whole thing is a mess, and if not outright corrupt then overwhelmingly incompetent, partisan politics aside. It also makes it pretty clear that the argument that this is all Snyder and the DEQ had nothing to do with it and did everything right is just hogwash.

    Still, Walters says she got nowhere with the DEQ. “When Miguel gave me that report, I did not make that public to get him in trouble; I made that public because I felt people had a right to know,” Walters told me recently. “I hoped that [DEQ employees] would do their jobs, that they would finally listen.” Instead, Del Toral’s supervisor, Susan Hedman, who recently said she would resign over her role in Flint, apologized to the state for his sharing the drafted memo, and Walters says DEQ staff bragged that he’d “been handled” and called him a “rogue employee” to the press.

    Also, lots of evidence that the salting of roads during winter was a major contributor to the problem:

    http://www.rawstory.com/2016/01/how-the-state-of-michigan-saved-a-few-bucks-and-poisoned-the-people-of-flint/

    The main contributor of the Flint River’s high chloride concentrations, according to Edwards, is road salt combined with the natural salt content of the river and the additional chloride the city uses to clean the water. “In US cities where ice is a problem in winter, the average road salt use per person per year is 135 pounds,” he says. “It’s incredible. In many northeastern cities because of road salt use, salt content in rivers has doubled in the last 20 years.”

    Dr Carla Koretsky, professor of aqueous geochemistry and biochemistry at Western Michigan University, has spent the last six years studying the effects of road salt on urban lake biochemistry.

    “There’s been a tremendous increase in the use of salt across the northern US and essentially globally as well. We’re building more roads and we’re salting more,” she says. “What happens when you put salt on the ground – it dissolves and goes into the surface water and eventually that gets channeled into Lake Michigan and the other Great Lakes.”

    And from Popular Science:

    http://www.popsci.com/whats-wrong-with-flint-river

    What’s in the Flint River?

    Lots of chloride ions, for starters. Chloride can occur naturally in rivers but may also be added by road salting, according to Marc Edwards, the lead Virginia Tech researcher testing Flint Water. Because of the chloride ions, the Flint River is 19 times more corrosive than the city’s previous source of water. The river water corroded city pipes, and the corroded pipes leached lead into drinking water.

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  3. Also on the issue of blaming Republicans for everything that happened in Flint, it is worth noting that the Mayor of Flint was a Democrat, and the city manager that Snyder nefariously forced on Flint was Darnell Earley, one tim director of research and public policy for the Michigan House Democratic Caucus, and was appointed to the Michigan Natural Resources Commission in 2005 by Democrat Jennifer Granholm. Mayor Dayne Walling, a Democrat, is one of the officials named in the recent lawsuit, along with Howard Croft and Micael Brown . . . eh, it’s just not as simple as “Republicans hate clean water and love poisoning the poor!”

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    • “Republicans hate clean water and love poisoning the poor!”

      We do… it is in our charter.. I am running the anti-Apple Pie and puppies task force…

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  4. I’m guessing he’s not being assigned in a ironic way.

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    • I am more appalled that Thomas Friedman makes the list at all.

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      • “In this Marxists and libertarians are united. They both think that opposition to their theories is based on ignorance of them when actually it’s the opposite.
        That’s why they are so dangerous to run into at cocktail parties.”

        In both cases, there are always exceptions. Sometimes many of them. Generally, the pure Marxists and Libertarians are kind of crazy, and so pure they are in the minority of people calling themselves “Libertarian” or “Marxists”. Opposition to Marxism or Libertarianism is difficult to quantify, because what the person is arguing that you are ignorant not so much of the theories but of what they, specifically, believe, and the pieces and parts they embrace.

        “I am more appalled that Thomas Friedman makes the list at all.”

        Not everything is taught, one hopes, with the idea that the content is correct. That Freakanomics isn’t in there is a damned shame, though.

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    • Don’t tell Aletheia. He’s convinced that the reason that Marxism isn’t popular is because it’s not taught in college.

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      • He’s convinced that the reason that Marxism isn’t popular is because it’s not taught in college.

        lol

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      • If only people would listen!

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      • If only people would listen!

        In this Marxists and libertarians are united. They both think that opposition to their theories is based on ignorance of them when actually it’s the opposite.

        That’s why they are so dangerous to run into at cocktail parties.

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        • yello:

          They both think that opposition to their theories is based on ignorance of them when actually it’s the opposite.

          I would venture a guess that not 5 out of 10 people could adequately explain either Marxist economic theory or libertarian political theory. (Or progressive/conservative political theory for that matter.) When a person thinks that Somalia is a good example of a libertarian paradise, it’s probably safe to assume they don’t know much about libertarian philosophy.

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  5. Like

    • The track record for Keynsian economics is uniformly abysmal… With good reason… Resources are allocated according to political fiat and not any sort of economic logic. Guarantees underperformance….

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    • Never let a crisis go to waste. I do not know, but I’m not sure that some of the policies were not implemented for reasons other than ending the Great Depression. I expect some of the more acclaimed policies of the New Deal were about taking an advantage of an opportunity to advance a particular ideological agenda (and expand the power and scope of government). Many of the ones that actually addressed immediate economics are rarely discussed or inserted into memes, and most of those were the Keynsian ones that were just bad ideas.

      I expect many who argue that FDR saved America from the Depression have little idea what those policies were, and what little evidence there was that they were doing anything but making things worse (thus, why so many of them were ended before the Depression finally ended).

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  6. If Kasich wins I’m leaving the country.

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  7. I didn’t watch the debate last night, but I have to say, even if you hate Ted Cruz (and a bewildering number of people seem to), you have to give him props for having the ‘nads to slam ethanol subsidies in Iowa a few days before the Iowa caucus.

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    • It’s the one thing he’s done that I agree with. And if you find it bewildering that people despise Sen Cruz, you haven’t been paying attention. That’s his goal.

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      • Mich:

        And if you find it bewildering that people despise Sen Cruz…

        I don’t find it bewildering that there are people who hate him. I would be more bewildered if you, for instance, didn’t hate him. What I don’t understand is why so many people hate him. When I talk with friends and acquaintences about the candidates, they almost routinely dismiss Cruz (even without any prompting by me) as a horrible person/candidate, but when I press them to explain why, they are mostly incapable of pointing out anything concrete. In fact many of them know almost nothing about him at all. It almost seems like they’ve just absorbed the notion that they are supposed to despise him, so they do.

        Anyway, what has he done to indicate to you that his goal is to have people despise him?

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        • I have read from people cleverer than me that hating Cruz in advance just saves you time in case you meet him.

          There is a gif circulating where Cruz is literally being given the cold shoulder by Jeb while Christie turns away as fast as he can.

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        • There’s some gif’s where Debbie Wasserman Schultz is being bitchy to Bernie Sanders, does that mean he’s a dick?

          Also, Jeb brushed off Rubio in a gif, assholes?

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        • yello:

          I have read from people cleverer than me that hating Cruz in advance just saves you time in case you meet him.

          Yeah…that sounds like exactly the kind of content-free justifications I was talking about (although certainly more witty than most for sure).

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      • There’s some gif’s where Debbie Wasserman Schultz is being bitchy to Bernie Sanders, does that mean he’s a dick?

        Pics or it didn’t happen.
        Also, Jeb brushed off Rubio in a gif, assholes?

        A plausible theory and not mutually exclusive with the premise that everybody who has met Cruz hates him.

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      • That bastion of unbiased reporting Mother Jones has the canonical list of who hates Ted Cruz and it includes:

        Bob Dole
        John McCain
        George W. Bush
        John Boehner
        Peter King
        Lindsey Graham
        Everyone on the 2000 campaign
        Supreme Court clerks
        Harvard Law School classmates
        His Princeton roommate
        Everyone else at Princeton

        In his defense, the New York Times cuts through the hyperbole and says:

        But does everybody hate Mr. Cruz? The answer is a clear no. In fact, some people like Mr. Cruz a lot.
        {snip}
        Mr. Cruz may not be popular in Congress, but among a specific segment of the Republican electorate — Tea Party supporters, evangelicals and those who describe themselves as very conservative — he has strong support.
        {snip}
        Not “everyone” hates Mr. Cruz, not even moderates.

        I just say those people need more time to get to know him.

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      • GIFs of politicians are a target rich environment. Are you perhaps talking about this one?

        Any preceived slight there is nowhere near as hilarious as when Dubya wiped his hand on Bill Clinton after touching a Haitian but nobody has made a GIF of that.

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      • It would be my position that Bush doesn’t like touching sweaty men. Which makes him wiping his hand on Clinton kind of ironic!

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  8. Man, that hand wipe is hilarious. That’s what happens when the elites interact with the hoi poloi.

    My favorite Dubya clip (proof he is a true Big government “conservative”):

    A quote he followed up with: “One of the things the president and I will do will make sure the money is spent wisely.”

    Isn’t that always the promise.

    Like

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