At the end of a strange week last week with lots of fresh data, two things stand out: mortgage and long-term rates stayed low, and market movements were magnified by mass escape from wrong-side trades.
On the surface the U.S. data is strong. September payrolls jumped 248,000 jobs, plus another 69,000 revised up from prior months. But the whole purpose of a job is to make money. Average hourly earnings rose… um… er… fell one cent to $24.53, up just 2.0% year-over-year before inflation.
The Fedās job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation. The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.
Global deflation
We are in a global deflation event, with which no one alive has or can have experience. Even those as old as I (65) have lived entire economic lives anticipating inflation, rarely high, usually moderate, and always present. Incomes have risen steadily, even if not so fast in real terms. Moderate inflation has been an enormous benefit to disciplined households. Mortgage debt is in nominal dollars, the original balance and payment gradually but steadily shrinking. Avoid buying things whose prices inflate (which varies cycle to cycle), and beat inflation.
The U.S. is in better shape — vastly better shape — than any other major nation with the exception of the UK. However, the absence of income growth, inflated or otherwise, is a telltale. One alternate explanation for a quarter of a million new jobs monthly and no wage growth: the unemployed and partially employed are taking jobs at poorer wages than old jobs, or — just as important for the youth set — poorer than expected.
Consider math that Americans have never had to consider. If I bought a home any time after 1935, I could expect my debt-to-income ratio at the outset to fall every year thereafter. The payment would become a smaller fraction of my gross income even if I did not upgrade my career, thereby adding safety (above all), increasing disposable income aside from the house payment, and I had bought an appreciating asset.
We are reverting to non-recovery
Friends in the financial world donāt get it. They are of-by-and-for markets in which any demand/supply disequilibrium is blamed on price. Thus today, just as they misunderstood home prices falling way below āclearing pricesā 2007-2011, they mistake last yearās home price rise as overdone and blame it for this yearās softening home sales. The alternate (real) universe: the bulk of last yearās home price rise (except in strong local economies, like mine) was due to a rebound in overly discounted prices, and now we are reverting to non-recovery.
We might get a housing recovery going if we backed off Dodd-Frank and Consumer Financial Protection Bureau (CFPB) hysteria, but thatās not enough. Home buyers are instinctively aware of this calculus: if my income is rising 2% per year, and Iāve got to pay 4.25% interest to buy a home which might not appreciate, maybe Iāll rent defensively even if rents are rising 5%, and beat that game by renting a lesser apartment? We need higher incomes and would have them were the world not holding us back.
Deflation. Italy downshifted its growth forecast from 0.8% to minus 0.3%, its wallpaper bonds (145% of GDP) rising to 2.32%. German 10s pay 0.89% in a currency falling fast versus the buck. Japan 10s pay 0.521%; in its suicidal miracle, it has inflated the cost of goods, but incomes less so. France will cut 1.5% from public spending, budget deficit still 4.5% of GDP, growth forecast cut to 0.4%, national debt 95% of GDP. Europe-wide year-over-year CPI fell last month to 0.3%.
The fantastic, panicked devaluation of euro and yen (soon to be joined by the yuan) is a desperate attempt to halt deflation overseas, but it exports disinflation to us.
Oh-by-the-way: the top geopolitical risk is now Hong Kong. China cannot hide a Tiananmen there, but neither can it tolerate this mass revolt. Perhaps it will fizzle. Click on the charts below to enlarge.
10-year T-note, one year back. Has deflation written all over it.
Ā Five-year T-note. No Fed fear here.
2-year T-note. No Fed fear here, either.
Goldās one-third loss in two years may be nothing but its periodic foolishness, but itās certainly not signaling inflation. Below $1200/oz for the first time in five years, and weak.
Oil, five years back. Lots of things in play. Cannot fall much more or makes fracking non-economic. Price therefore self-limiting for now, but hardly inflationary.
Copper four years back. Unlike oil and certainly unlike gold, copper is a proxy for global GDP.
The euro in the last year, Down to $1.25 today, going lower. Down 9.5% in five months. BTW: oil is invoiced in dollars.
The yen in the last year. Up is down, now almost 110/dollar. Crashing 6.5% in 60 days.
The purpose of it all: making money. Low unit labor cost is a two-edged sword. I am not at all sure what the Fed can or should do if US inflation begins to fall again — as it has already, from touching 2% this summer to 1.5% now.
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