Real Median Household Income Highest Since February 2002 (But M2 Money Velocity Continues To Tank)

According to Sentier Research, in April, real median household income reached $59,361, according to the latest report from Sentier Research. That’s up 2% since January, and is as high as it’s been since February 2002 (or 15 years). Expressed as an index, median household income was 100.9 in April, which is the first time this index has topped 100 since December 2008.

Now, if the central planners in DC can just get money velocity (GDP/Money Stock) to stop diving!

Boola, boola, boola! 

The Fed’s Dual Mandate (And The Phillips Milk Of Magnesia Curve) — Why Wage Inflation Isn’t Happening

The Federal Reserve has a dual mandate to 1) promote maximum employment and to 2) keep prices stable.  The Fed has a target rate of core inflation that is 2%; however, it has been unable to achieve this target since the end of The Great Recession even though unemployment has declined.

Yes, the Dallas Fed’s trimmed mean Personal Consumption Expenditures Inflation Rate did exceed 2% back in January 2012, but generally it has been below 2% since June 2009.

But why is inflation so low even when unemployment is so low (as in 4.4% as of April 2017)?

A partial answer lies in the dismal earnings recovery after The Great Recession. Notice in the chart below that the U-3 unemployment rate (blue line) has declined below the natural rate of unemployment (red line) as economic recovery strengthens after each recession. Except for after The Great Recession. Once again, the U-3 unemployment rate has finally dipped below the natural rate of unemployment … yet no wage inflation.

The green line represents the inverse of YoY hourly earnings growth for the majority of the population (Production and Nonsupervisory Employees). You will notice that wage growth accelerates as unemployment declines, particularly when the underemployment rate is below the natural rate of unemployment. Except for the current “recovery.”

Bloomberg has a nice piece of several reasons why the current wage recovery is so low.  Another explanation that Bloomberg did not mention is that the US saw an unprecedented wave of regulations (Affordable Care Act, Dodd-Frank, EPA, the Consumer Financial Protection Bureau, etc.) most of which did nothing to help wage growth for mere mortals. Not to mention increase capital-labor substitution (robots replacing workers). But an easy answer is that the Phillips Curve is seemingly dead (decreased unemployment correlates with higher rates of inflation).

But WHY is the Phillips Curve dead? It makes intuitive sense that wages will rise as labor slack vanishes.  But what are some other explanations for the failure of the Phillips Curve to kick in? Or maybe it is about to kick in?

Clearly, outsourcing of higher-paying jobs overseas is a factor. Or could it also be the poor quality of American education that makes students uncompetitive in the modern economy? Or are US firms not investing in plants and equipment anymore?

But with commercial and industrial lending YoY slowing and the decline in real gross domestic investment (nonresidential equipment), wage growth may still be some time away.

The Fed’s zero interest rate policies (ZIRP) and quantitative easing (QE) ..

have certainly helped pumped up asset prices (like housing and the stock market).

But not wage growth (worst post-recession wage recovery in history … or at least since 1965). In other words, The Fed has not really benefitted wage growth, only asset price growth.

Suffice it to say that have full employment AND increased wage growth would be a blessing to the economy and housing market. I hope so. I am tired of reading research papers that claim that a HUGE Millennial wage of home purchases is going to kick in any quarter. At least I hope their predictions work better than the Phillips curve.

Core CPI YoY Falls Below Fed’s 2% Target To 1.9% (While Core PCE Growth Falls To 1.56%)

I doubt if anyone on The Fed’s Open Market Committee (FOMC) cares, but Core CPI YoY has been falling and is now below The Fed’s target inflation rate of 2.0%. Core CPI YoY is now 1.9% for April.

Let’s compare Cpre CPI YoY with Core Personal Comsumption Expenditures YoY. Core PCE growth is also below 2% and shows that same declining pattern of Core CPI growth.

U

The FOMC seems to more heavily weigh U-3 unemployment since a lack of slack is supposed to lead to wage inflation. Note that NAIRU is above U-3 unemployment by over 50 basis points.

Regardless, Chair Janet Yellen should start wearing a Nehru jacket and hat. Or it that a NAIRU jacket and hat?

 

Venezuela’s 99.5% Currency Plunge Shows Why Protests Rage (Highest 2Y and 10Y Sovereign Yield In World)

Well, a 99.5% currency plunge isn’t the ONLY reason why protests are a daily occurrence in Venezuela.

(Bloomberg) — President Nicolas Maduro has overseen an unprecedented depreciation in his country’s currency since taking office, with the bolivar now down 99.5 percent to 5,100 per dollar in the black market that everyday Venezuelans use. The sharp decline has wiped out savings and made buying imported goods all but impossible, helping fuel the anger directed at the government in street protests that have turned deadly in recent weeks. While Maduro has raised the minimum wage almost 20 times during his tenure, it’s still the equivalent of just $40 a month.

Yes, the blackmarket currency which many Venezuelans use has actually fallen 99.5% under Maduro.

Say, The US Federal Reserve’s destruction of the purchasing power of the dollar since The Fed’s creation looks absolutely sedate compared to Maduro’s Bolivar destruction.

Here is the OFFICIAL CPI YoY for Venezuela (last reported at the end of 2015 and it was 181%). Things have gotten far worse since then.

Of course, Maduro and his pals have effectively destroyed the once productive oil industry (by replacing competent managers with political hacks). Then we have the nationalization of the the auto industry, forced production of goods (like ordering bakeries not to produce desserts and only produce bread), etc.  Very reminiscint of the old Soviet Union — a command rather than a demand economy.

Venezuela’s 2 year sovereign yield (in US dollars) is the highest in the world at 37%.

And Venezuela’s 10 year sovereign yield is also the world’s highest at 23.8% (once again, denomiated in US Dollars).

Venezuela sovereign yield curve is steeply downward sloping, as is their credit default swap (CDS) curve. Their 5Y CDS is at over 7,000 at the 6 month mark.

What a complete and utter disaster the once thriving Venezuelan economy has become under the dynamic duo of Hugo Chavez and Nicolas Maduro.

Here is Venezulan President Nicolas Maduro singing “Wasted Days and Wasted Nights” about economic progress under his iron-fisted rule.

 

California Public Pension Shortfall One of Nation’s Largest (Kentucky, New Jersey, Illinois, Colorado The Worst)

The Pew Charitable Trusts recently came out with their study, “The State Pension Funding Gap: 2015”. PSRS_The_State_Pension_Funding_Gap_2015 And an ugly picture it paints of state pension funds.

Here is a nice editorial from The Sacramento Bee:

Throughout California, local government and school district officials are writing new budgets and confronting rapidly rising costs of pensions.

Many have seen their costs double in the last few years, largely consuming revenue increases that the state’s expanding economy have produced. For instance, a projected $1 billion increase in school districts’ teacher pension costs in 2017-18 will more than equal projected revenue gains.

However, as the old rock song says, “You ain’t seen nothing yet.”

Lackluster earnings by pension trust funds, revised actuarial projections and impacts of benefit increases are compelling the systems to sharply increase mandatory “contributions” from public employers.

Nevertheless, pension systems have seen their “unfunded liabilities” continue to increase – giving California one of the nation’s widest gaps between earning assets and pension obligations.

California’s unfortunate status is confirmed in a new report from Pew Charitable Trusts, which found that in 2015 the state’s two big pension funds had the nation’s sixth-worst record of reducing unfunded liabilities, gathering just 79 percent of the $18.9 billion they needed to keep their pension debts from rising.

California’s status may have worsened since then. In 2015, Pew reported, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System had 74 percent of what they needed to meet pension obligations, but that ratio has since dropped to about 64 percent due to reductions in their projected investment earnings.

The worst according to net amortization? The net amortization calculation recognizes strong contribution policies. It reflects plans’ assumptions and actions, as well as the market forces at hand. Six states—Colorado, Illinois, Kentucky, New Jersey, Pennsylvania and California—fared worst on this benchmark in 2015. But Kentucky is the worst giving new meaning to the term “Kentucky windage.”

The worst funded ratio for 2015? New Jersey, Kentucky and Illinois — all at 40% or lower.

Just as troubling is the rising state pension liabiities versus pension assets.

The abysmal performance of pension fund managers is partly to blame, which is hard to imagine when stock and real estate prices have been soaring (particularly with the low cost of funding courtesy of The Federal Reserve).

But the real problem is Defined Benefits programs (Ohio switched to Defined Contributions back in the 1980s).  But as the Baby Boomers retire in force, the pension coasts will continue to skyrocket.

Why didn’t state governments plan for this pension explosion? And what happens if asset bubbles burst?

“Yes citizens, you are going to have to bail out our state workers and teachers. But after we try to get the Federal government to pay for the pension shortfall.”