Posts filed under “Federal Reserve”
“Rising Oil prices are like a tax.”
I’ve heard that canard repeatedly over the years. There are lots of reasons why this is not quite true – unlike a tax, lots of petrodollars leave the country, and don’t get recirculated. However, high Oil prices are a drag on very specific types of consumptive activity: driving, traveling, manufacturing, home heating are the prime endeavors that get curtailed.
Inflation is a much more pernicious a “Tax” than Oil – and on more kinds of economic activity. The ongoing reduction of the dollar’s purchasing power (a/k/a inflation) impacts much more of the economy than even energy price increases do. Consider high energy prices are merely one aspect of inflation. Everything else that rises in price – from industrial metals to insurance to housing to health care to construction materials to education to food to precious metals – impacts everything else, plus a wealth of activity that inflation acts as a tariff upon.
High inflation taxes savings, as a dollar saved becomes only a half-a-dollar earned. Indeed, why save if all you accomplish is watching your purchasing power erode? (Perhaps this is why the savings rate has plummeted). Inflation also hurts investment, as it reduces real returns, and therefore discourages parking monies for longer periods of time.
As we have heard so often from the politicos, if you want less of something, tax it more. Those who are willing to appease inflation and sacrifice long term purchasing power for a short term growth spurt do just that: They discourage savings, retard investment, reduce consumption, dampen hiring. If you ask me, that’s a really bad tax policy.
Consider a home purchased in 1970 for $100,000; If it was sold for
$400,000 $514,949 today, (according to BLS Inflation calculator) the gain would merely cover inflation. In real, after-inflation terms, your returns were zero – Nada, zip, zilch, nothing. And that is why inflation is so pernicious, and why it is incumbent upon the Fed to stay on top of it, even daresay I at the risk of slowing growth.
Ponder this: The Dow and SPX, despite reaching 5-year highs, have returned less than 5%/year over the same period. Though CPI estimates for inflation are below 5%, we know in real world terms (where we eat and use energy) these gains failed to keep up with inflation. In other words, real returns are negative versus actual – not BLS measured – inflation. Perhaps that explains why U.S. Equity markets have under-performed every other asset class and emerging market, with the lone exception being U.S. Treasuries.
Away from inflation – or perhaps because of it – we continue to watch the markets internals slowly deteriorate: The advance decline line has not confirmed recent Dow highs; the NYSE A/D line topped out in March. Meanwhile, mutual fund cash levels are down to low levels. And, we are about to enter the seasonally weakest period of the year. We have been positioned as “uncomfortably” bullish these past few months — our view remains first half rally, second half trouble — and we note that these elements mean risk is rising.
We strongly urge increased caution.
Originally emailed 5/2/06 ~11am
“Every Change of Rate” is an utterly hysterical parody of the black & white Police video “Every Breath You Take,” as done by some Columbia Biz School students; Its an amusing take on the Ben Bernanke, the newly appointed Fed Chief. My favorite bit are the lyrics during the second verse: “First you move your…Read More
Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.
Before you declare the end of the housing slow down, consider:
- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;
- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or 5.5 months’ supply; That’s the largest inventory since July 1998
- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)
- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;
- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.
Here’s a data point that has me scratching my head: Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted? Was this March somehow in a different season than last year’s March? I am perplexed.
Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.
So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.
Let’s move onto some anecdotal evidence. A friend writes:
"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space. When was the last time you saw that in California? "
Here’s the sales pitch:
"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s."
I don’t know Live Oak, but houses like that in California are hard to imgaine . . .
More after the jump.
Existing-Home Sales Rise Again in March
NATIONAL ASSOCIATION OF REALTORS
WASHINGTON (April 25, 2006)
Existing Home Sales data
NATIONAL ASSOCIATION OF REALTORS