Morning Report: Wages and assets 10/27/16

Vital Statistics:

Last Change
S&P Futures 2142.4 9.0
Eurostoxx Index 341.9 0.1
Oil (WTI) 49.3 0.1
US dollar index 88.7 0.0
10 Year Govt Bond Yield 1.84%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.58

Back from the MBA conference in Boston. The main chatter was about Ginnie’s new plan to discourage the serial VA IRRRL shops. Consensus is that it will work because it will decimate the margins on these loans. The prepay speeds on VA loans have gotten so high that Ginnie Mae servicing prices are being affected.

Separately, Richard Cordray took aim at servicers at the conference.

Let’s get caught up on economic data.

Durable Goods orders fell 0.1% MOM in September. Business capital expenditures fell 1.2% MOM and are down 4.1% YOY. Some of that has been due to the strength in the dollar, and continued fallout from energy prices.

The Chicago Fed National Activity Index improved to -.14. The 3 month moving average (the number to look at) is still negative at -.21, which means the economy is growing below trend. When the 3 month MA drops below -.7 that is a recessionary signal.

Home prices continue to rise according to the FHFA. Prices increased 0.7% MOM and 6.4% YOY in August. Prices are now about 5% higher than the peak 2006 levels. Note that this is a subset of all homes (only those with conforming mortgages) but it is a good estimate for the “middle of the plate” housing in the US.

Separately, Case-Shiller was up 0.2% MOM and 5.1% YOY.

New Home Sales came in a little lighter than expected, up just under 600k, however July and August were revised sharply downward. The South performed best, while the West performed the worst. Take the Census numbers with a grain of salt, however. The sample sizes are small and therefore the confidence intervals around those numbers are very wide. Homebuilder earnings usually tell the story a bit better.

Mortgage Applications fell 4% last week as purchases fell 7% and refis fell 2%. Purchase activity is still up smartly YOY, however refis are at the worst levels since June.

Initial Jobless Claims came in at 258k, which is a quite strong number.

Wages are increasing for skilled labor, especially in construction. Below is a chart plotting annual wage growth for manufacturing and construction labor. Construction labor wage inflation is back to the bubble years, and manufacturing wage growth is approaching those levels as well.


Ultimately this is good news for the economy. Wage growth has been a disappointment in this recovery. This probably isn’t great news for homebuilding stocks (the SPDR homebuilder ETF XHB is down about 13% over the past 6 weeks), and is probably not great news for manufacturers either. That said, the elephant in the room is the Fed. Does this push the Fed to hike more aggressively than forecast? Given how many times the Fed has gotten cold feet already, and the fact that unskilled labor remains in a glut, I don’t think so. Janet Yellen has said the Fed will let the labor market run hot for a while in order to bring back some of the long term unemployed.

In the same article, Joe Lavorgne of Deutsche Bank has a chart that is a bit more worrisome, which looks at the ratio of household net worth to disposable income. We are back at levels associated with the stock market bubble peak and the residential real estate bubble peak. Taking this chart at face value you would probably conclude that asset prices are in bubble territory, which is definitely the case for sovereign debt. However, if wage growth is accelerating, then the ratio will fall going forward, for the right reason. However if wages continue to stagnate, then yes we could be vulnerable to a sell-off in asset prices.


33 Responses

  1. Frist!

    Great podcast on the Toyota “sudden acceleration” problem. And how Toyota paid out over 2 billion dollars for what was almost certainly people becoming confused between which pedal was the brake and which one was the accelerator.

    I loved the part where Consumer Reports doesn’t mention the most common cause of sudden acceleration—people pressing the wrong pedal—and then give people the advice most likely to kill them: put your foot on the brake pedal, push it all the way down to the floor, and never lift your foot until you careen out of control and die. Well, they didn’t put it that way, but . . .


  2. Frist.

    Thanks for this food for thought. Because the next POTUS will not be Gary Johnson (whose campaign has been a disappointment for its lack of cohesive energy and Biden like gaffes) but someone who wants to spend “bigly”, while the likely HoR will not want to spend at all, I don’t see a major fiscal response to recession signals on the horizon. That being the case, I am willing to bet the Fed continues low interest rates for the duration of iffy signals.


    • mark:

      someone who wants to spend “bigly”

      My office has been having a debate about this…some people say that he is actually saying “big league”, not “bigly”. Personally I have no idea because I try not to actually listen to anything he says. But I just wanted to put it out there….


      • I have been told that what sounds, in Texas, like a New Yorker saying “bigly” is actually a New Yawkeh saying “big league.”


      • I’ve heard that explanation as well, Scott. But contextually it doesn’t make any sense. . . so who knows what he thinks he’s saying!


    • With the debt as high as it is and with massive deficits that will go on seemingly forever and with a Fed Chair that loves government and spending, in what world can interest rates go up in any meaningful way?

      I posit they cannot.


      • The biggest players in the Treasury market are non-economic actors who make decisions based on policy, not expected gains and losses. The Fed didn’t start QE because they thought bonds were cheap – they did it to goose the economy.

        But I do believe that all of this central planning in the interest rate market has had the effect of creating a misallocation of capital which will cause the economy to underperform.


  3. Yes, it was about personal enrichment.

    “Inside ‘Bill Clinton Inc.’: Hacked memo reveals intersection of charity and personal income”


    • “the RNC strictly abides by the consent decree and does not take part directly or indirectly in any efforts to prevent or remedy vote fraud. Nor do we coordinate with the Trump campaign or any other campaign or party organization in any efforts they may make in this area.”

      So the consent decree prevents any attempts to remedy or prevent voter fraud? That’s convenient for the left…


  4. Overall, between the end of her tenure as secretary of state in February 2013 and the start of her 2016 White House bid, Clinton was paid about $21.6 million in speaking fees, according to her federal financial disclosure forms.

    They must be stemwinders.

    But, “pussy”, so….


  5. Wanting your upstairs neighbor to not be screaming and stomping on the floor at 2:00 am so you can sleep is racism!

    For pity’s sake.


    • Many of the comments give me at least some hope for humanity, however.


    • KW:

      I have to admit that the thing I found most irritating was the obsequious response of the downstairs neighbor to all the attention:

      …but please do not perceive me as just another narrow-minded white p—- scared of anything outside of his little white world,” he wrote back to Brookshire. “I have nothing in common with such people

      Maybe this isn’t a fair conclusion, but I can’t help but think that this guy is ideologically simpatico with Brookhiser, and in another context would actually agree with his racist “white privilege” bullshit. If so, I think he may actually be a suitable victim for Brookhiser’s chip-on-his-shoulder assholery.


      • privilege is a figment of the left’s imagination…


        • Privilege is a real thing. I am privileged in many was because of my background and where I live, but less privileged than others. Others have more privileged backgrounds but less privileged locations, or vice versa. I have been privileged to enjoy certain random experiences and relationships in my life that many others have not; others have been privileged to meet and spend time with people or in environments that I never will. Dude in the article was privileged to go to college, live in Manhattan, and write what would be considered a racist screed to his neighbor, had their races been reversed, and find himself generally praised for it. He was privileged to be an inconsiderate a$$höle and be lionized for it in the Washington Post! Talk about frickin’ privilege.

          I have the privilege of having had ancestors who were poor, but worked, with each successive generation improving on the material well-being of the family, and living in a culture that has done much the same. I’m privileged that I have never had to want for food or shelter or clothing, but not as privileged in these areas as others. I think the majority of my white privilege is by proxy—what people call “white privilege” was legitimately a thing in the 1960s and 1950s and 1940s that it isn’t now. Thus, my white ancestors benefitted from it, and I was in a better position (though slightly, in my case) because of it.

          There is very little universal group privilege, unless you break things up by economic class. The rich enjoy privileges poor people don’t, because . . . well, duh.

          Even with privilege, there ain’t no such thing as a free lunch. Many scions of the uber-wealthy end up living pathetic, shallow, spoiled lives, or their parents have to devote a lot of extra energy to keeping their kids’ heads out of their asses while they are growing up.

          And privilege has it’s limits. I may be privileged in the career I was able to pursue, for example, but less privileged when it comes to my ability to complain about someone keeping me up all night acting like an entitled a$$hôle.

          The problem with privilege is it’s like saying someone has money. One dollar is not the same as ten dollars or a million dollars. One dollar is also not the the same as one yen or one bitcoin or a physical item that you believe has a trade value of one dollar. Everyone has certain privileges and there will also be people with more privilege than you, or me.

          What I’d argue is that there is no insight to be had from accusing people of having “white privilege”. Unpack what you mean specifically, so that it can be examined and discussed. Explain why you now get special privileges, generally that you assign to yourself or what you consider your group, because of the perceived privileges of these other people.

          If white privilege means that me and Bill Gates should be moving in the same circles, though . . . then I agree, their ain’t no such thing.


      • @Scottc1: “Maybe this isn’t a fair conclusion, but I can’t help but think that this guy is ideologically simpatico with Brookhiser, and in another context would actually agree with his racist “white privilege” bullshit.”

        They are both Manhattanites. That’s good for a New Yorker—a serious fellow traveler would have apologized, and then explained he was going to retreat to his apartment and contemplate what’s wrong with him, that such unconscious racism could have ever come from him in any form.

        That being said, such a tepid response to obvious bullcrap is in itself offensive, but I could imagine that he might prefer to defuse the situation, rather than invite the whole of Manhattan’s Social Justice Warriors down upon his lily-white privileged head.

        Things I found most annoying were the support post quoted (I assume there were other posts, less enthusiastic, ignored): “In sharing it, Jasz Edward wrote: “This is a perfect example of how to keep your cool when you confronted ignorance. Don’t stoop to their level… To quote the FLOTUS “When they go low we go high!” Rock on Richard with your bad self!””

        Really, that was her take from that? And this:

        ““You’re basically asking me to adhere to your norms. You’re coming in with what you feel is the right volume and the right temperature for the community and you’re trying to hang that over my head,” said Trujillo, who is Hispanic. “The police are the tool that can be used to bash people over the head with those new norms.””

        So the argument is that somehow being obnoxious is now a cultural affectation, and so any complaint of, say, playing hour-upon-hour of loud music in the wee hours on a school night is not about the loud music, but the race of the person you are complaining about. Sheesh.


    • What’s ironic is that if you watch the most recent episode of SNL with the Black Jeopardy skit, the skit ends when the downstairs neighbor bangs on the roof with a broom because of the noise level.

      Clearly the downstairs neighbor should just call the cops the next time this happens.


  6. Flashback to April, and a victory for White Privilege:

    Good thing for him that Woodrow Wilson was a Democrat, I guess.

    The protesters didn’t help their argument:

    ““[Woodrow Wilson] is a murderer. We owe him nothing. This university owes us everything. I walk around this campus understanding that this was built on the backs of my people and I owe none of you guys anything. We owe white people nothing. If not for the evilness and of white hatred in this country…we would not have to be fighting for our rights.”
    She adds, “All of this is mine. My people built this place.””

    Their demands?

    “1. Remove Woodrow Wilson from all building names
    2. Cultural competency training for staff and faculty at the university
    3. Mandatory classes for students on, “the history of marginalized peoples,”
    4. A marked cultural space on campus for black students.”

    Hopefully, the marked cultural space would have been separate but equal.

    Anyhoo, that was all in April, I know. Just listened to a podcast that brought it back up. And I’m sure the issue will come up again.


  7. Thinking about the Woodrow Wilson thing some more. Woodrow Wilson was an awful person, but he’s long gone, and having a school named after him only means something to you if you make it mean something to you. It’s like protesting the unfairness and violence of the Peloponnesian wars. Too little, too late. There’s lots of things named after awful people or slave holders or racists that, if they are a thousand years back in the past, everybody shrugs for the most part.

    At the same time, if there was a Hitler School of Communications at my college, I think I’d at least sign a petition to change the name.


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