Fed’s Fischer Sees Productivity Behind Slow U.S. Growth(?)

I frequently get a headache trying to understand Stanley Fischer’s speeches or interviews.

OK, US labor productivity is declining. But he is hoping the technological advances with fix the problem? Other than create even MORE unemployment?

“We’re growing at around 2 percent, and the problem we face is that of productivity,” Federal Reserve Vice Chairman Stanley Fischer said in an interview on Bloomberg Television Tuesday. Growth in workers’ output per hour has been restrained by factors including an aging labor force and weak corporate investment. The former Bank of Israel governor said he sees hope for a pickup eventually because “remarkable” technological advances haven’t showed up in the data yet.

I wasn’t quite sure what Stanley Fischer meant by growing around 2%, since both nonfarm output and real GDP are growing at substantially lower rates than 2%.


I hope Stanley isn’t talking about the technological innovations like the pizza making machines that are being turned to as minimum wage legislation gains traction. Hopefully, he is talking about technological innovations (like the industrial revolution) that increase higher wage employment.


Home Prices Decline 3 Straight Months In A Row (Portland Leads, NYC and DC Tied For Last)

The CoreLogic/S&P/Case-Shiller home price indices are out for June! Yes, it is almost September.

The results? On a seasonally adjusted basis, this was the third straight month of month-over-month growth.


The leader MoM in terms of price growth were Seattle, Detroit and Cleveland. The biggest decliners? San Francisco and San Diego. On a YoY basis, Portland was the biggest winner with New York City and Washington DC being the slowest growers.





Personal Income Increases 0.4% In July (Down To 3.26% YoY From 6.25% For Oct ’14)

Economists were thrilled with today’s reading of +0.4% growth in Personal Income for July. Personal spending rose +0.3%.

The year-over-year change tells a different, more sobering story. In July, Personal Spending grew 3.26% YoY. While that sounds great, bear in mind that Personal Spending was growing at a 6.25% YoY clip as recently as October 2014.


Do I detect a trend?



Welcome To Hell(ocs)! Home Equity Loans Come Back to Haunt Borrowers, Banks

A home equity lines of credit (or HELOC) is a loan, using your home as collateral, that lets you borrow up to a certain amount, rather than a set dollar amount. A HELOC acts like a credit card: It has a credit limit, and you can borrow against it, pay all or part of the balance, and borrow again up to the credit limit. The interest rate varies with the prime rate.

But many HELOCs were interest-only for the first 10 years, but interest plus principal for the next 15-20 years kicking up the monthly payment due.

According to the Wall Street Journal, 

“The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks.

More homeowners are missing payments on their home-equity lines of credit, or Helocs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years.

The increased cost of the loan can become a strain for some borrowers. This is becoming an issue now because many borrowers signed up for Helocs in the run-up to the housing bust as home values kept rising. Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax. That represents 4.4% of the balances on outstanding 2006 Helocs. Delinquencies were at 2.9% before the reset.”

As of Q1 2016, HELOC charge offs had declined to pre-crisis levels.


But the NON-current rate for HELOCs has remained over 2.5% since 2012.


So, here we go as interest-only HELOCs payment suddenly convert from IO to principal pay down as well. Making the HELOC payment increase.

And with HELOCs, it is not “Who are you?” but “WHAT are you?”


Surprise! New Home Sales Surge 12.37% To 654k SAAR, Back To 1995 Levels

New home sales surprised most analysts this morning. New home sales rose 12.37% in July to 654k units SAAR.


The median price for new homes sold fell -5.12% and the months supply of new homes fell -12.2%.

While the median price for new home sales has risen to above the levels seen during the housing bubble, mortgage purchase applications are lower than during the housing bubble (although purchase applications have been rising since 2015).


The Northeast and South saw the biggest gains with the West reporting no gains.

How bad was the housing and mortgage credit bubble burst? New home sales are finally back to 1995 levels.


Adjusted by population growth, new home sales are back to the 1991 recession as Logan Mohtashami points out.


And considerably below 1963 levels when adjusted for population.


The tightening of credit standard since 2007 helps explain, in part, the decline in mortgage purchase applications and the stalled new home sales recovery.



Left to right: Hamish Linklater plays Porter Collins and Rafe Spall plays Danny Moses in The Big Short from Paramount Pictures and Regency Enterprises

Left to right: Hamish Linklater plays Porter Collins and Rafe Spall plays Danny Moses in The Big Short from Paramount Pictures and Regency Enterprises

Fear! Another $4 Trillion Of Asset Purchases May Be Needed By Fed In Another Severe Recession

As we approach the annual Jackson Hole symposium for the Federal Reserve (this year’s theme is “Designing Resilient Monetary Policy Frameworks for the Future,”) the Fed released a working paper titled “Gauging the Ability of the FOMC to Respond to Future Recessions.”   2016068pap In this paper,  the author (David Reifschneider) finds that “simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.” And the amount of the large-scale assets purchase would be … $4 trillion.

In other words, The Fed would have to purchase ANOTHER $4 trillion in assets. The Fed’s asset purchases (or Quantitative Easing [QE]) have totaled $4.5 trillion as of today, the majority of which happened following the house price and credit bubble explosion in late 2007 and 2008. To be exact, $3.56 trillion added (net) since September 3, 2008.


But despite a Fed Funds Target rate of 25 basis points from December 2008 to December 2015 (the Fed Funds Target rate was raised in December to 50 basis points or 0.50%) and a $4.46 trillion expansion of The Fed’s asset balance sheet,  core personal consumption expenditures YoY remains at 1.57%. That was a lot of effort by The Fed to generate 1.57% core PCE growth.

So, the finding of The Fed’s David Reifschneider is that even MORE asset purchases will be needed for the next severe recession. Since The Fed’s activities (and global pressures) have already pushed interest rates close to the zero-bound.

Since September 10, 2007, the US Treasury actives curve has fallen over 350 basis points on the short-end of the curve and over 250 basis points at the 10 year tenor (maturity).


Unless the US moves to negative nominal rates at the short-end, more and more asset purchases will generate less and less positive results.

Here is a chart of the US Dollar since 2007.


On the unemployment side, the U-3 unemployment rate has fallen to the natural rate of uemployment, so there isn’t a lot of room for further declines. Of course, a severe recession would like cause a large increase in unemployment again.


So, there you have it. Another severe recession will require The Fed to engage in the purchase of another $4 trillion in Treasury Notes (and perhaps agency mortgage-backed securities). But unless interest rates rise before the next severe recession, there will be little room to move without going to negative interest rates.