All About the Money
‘When someone says, “it’s not about the money”, it’s all about the money.’
Giants Manager, George Young
As we guessed last week, the two legs of American middle-class wealth, income and houses, are buckling. It’s still very early…but both seem to have begun downtrends. These are not isolated phenomena. Instead, they are among the many ‘dots’ that, when connected, look for all the world like Ursa Major…as in, a major bear market.
Yesterday, we explored the ‘primary trend’. Once underway, it tends to last for decades. You can ignore it; you can fight it; you can deny it. But you can’t stop it.
Stocks were in a primary downtrend from 1966–82. Before that, the primary trend was up, from the bottom of the Great Depression until the mid-‘60s. The most recent bull market primary trend began in August of 1982 and continued until December 2021.
If a new, bear market primary trend has begun, we’ll see real values for stocks go down for many years. Few baby boomers will ever again see equities so richly priced as they were at the close of 2021.
Primary trends in the bond market are even longer. Bonds appear to have hit a major top in the summer of 2020, with the yield on the US 10-year bond down to 0.55%. The previous top occurred — get this — back in the late 1940s, 70 years ago.
A relentless trend
Markets move up and down all the time. Day to day…week to week…month to month. Often, there are countertrends that last for years. As we saw yesterday, it took four years of wiggling and waggling after 1980 before the primary trend — towards lower interest rates and higher stock prices — was clearly established.
But a primary trend is relentless. And now, after four decades of rising stocks and falling interest rates, have we just witnessed the beginning of a new one? Probably. Because it’s about the money. The trend of the last 42 years was sustained by borrowing at lower and lower interest rates…with dramatic ‘saves’ by the Fed whenever a correction threatened. But those rescues are no longer possible.
Let’s look first at jobs and housing for a minute:
Initial jobless claims have been rising since March and are now at a new high for the year. Shopify, 7-Eleven, Tesla, Vimeo, Rivian, Gopuff, RE/MAX, Redfin, Microsoft, Morgan Stanley — have all announced layoffs.
The job market was never as great as advertised. The index of total hours worked in the US economy is now at 119…exactly where it was in March 2020, which means there has been no growth for the last two years. If there are more jobs, it just means that income is being divided among more workers.
And hourly wages meanwhile just suffered their biggest decline in 15 years — with a 3.9% inflation-adjusted drop.
Home sales plummet
As for housing, the ‘affordability index’ is back down to levels that haven’t been seen in 14 years. It’s the combination of wages, prices, and mortgage rates that determine how affordable a house is. And after spectacular increases in both prices and mortgage rates, houses are now as unaffordable as they were just before the last housing crisis — in 2007. Once again, the typical family cannot afford the typical house.
And now, the ‘dots’ — showing a downturn in the real estate market — are coming together. NAHB’s ‘Housing Market Index’ just fell to a two-year low. Builders say they are reducing prices to ‘limit cancellations’.
Builders are becoming reluctant to put up new houses, with Housing Starts at a 14-month low in June (down 6% year-over-year). And new home sales are down 43% from their 2020 high. Existing houses, too, are no longer flying off the lots. Sales are at their lowest levels since June 2020.
Prices are still near record highs, up 40% since 2020. But the most recent reports tell us that they are beginning to sag. The median price of new houses dropped by 12% over the last two months. And it looks like a truce has been declared in the bidding wars. In January, nearly seven out of 10 houses drew competing bids. In June, less than 50% did.
When jobs and housing give way, households need to crack open their piggy banks…borrow…or cut back. The evidence suggests they are doing all of the above. Savings rates are down. Debt is up. And inventories of unsold merchandise are piling up at Walmart. That is what happens in a recession.
But what suggests to us that this is a primary trend, rather than a noisy, short-term feint, is this: for the first time in 30 years, the Fed can’t do anything about it.
Since the switch to a pure paper dollar in 1971, the Fed controls the money. And for the first time since Alan Greenspan came to Wall Street’s succour in 1987, the Fed can no longer salve investors’ hurts with easier credit.
After the Crash of ’87, Greenspan cut rates. Not fast enough, according to then-president George HW Bush, who said the sluggish economy cost him the White House. Greenspan wouldn’t make that mistake again.
In the downturn of the early ‘90s, Greenspan got out his machete and hacked off 500 bps (500 basis points = 5%) from the Fed funds rate. Then, by the time the Nasdaq bubble collapsed, he was good at it. Between 2000 and 2002, he lopped off another 550 bps.
The next correction came on Ben Bernanke’s watch when the mortgage finance crisis hit. Bernanke knew how to play the game too; 525 bps were trimmed in three years. But then, Bernanke went further, with Quantitative Easing…then ‘Operation Twist’.
And when it was Jerome Powell’s turn, his response to the COVID panic was almost automatic. Rates were cut down to zero. And the federal government used its ‘printing press money’ as though it had been dropped from a helicopter. Stimmies, Payroll Protection, unemployment ‘boosters’ — it was great fun while it lasted.
But then, consumer prices rose…and suddenly, it was a whole new ballgame. The Fed’s key lending rate was already near zero; how could it be cut further? And with inflation edging up towards the double digits, what kind of a fool would dare to cut interest rates now?
That is what we wait to find out.
For The Daily Reckoning Australia