Category: housing

Housing, Unemployment and CPI

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January 19th, 2014

A strong retail report for December and an improvement in sentiment among small business owners buoyed the market at the start of the week.  Both reports continue a trend that indicates a healthy economy:  results are at at the upper bound or above expectations.

The latest report of  jobless claims at 325,000 pulled the 4 week average further down away from the psychological mark of 350,000.  This is sure to reassure short to mid term traders.  The weak BLS employment report released a week ago may have just been an anomaly.  Other employment indicators, as well as retail sales and business production simply do not confirm the headline numbers from the BLS.

The Consumer Price Index for December showed a mild 1.5% year over year increase and will reassure the Fed that its stimulus program poses little danger of igniting inflation.

The National Assn of Homebuilders reported continued strong growth in their Housing Market Index.

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Featured on one of the blogs that I link to is a chart of the annual returns of the SP500.  Double digit gains in the index, like the one we had last year, are rather common, occurring about 40% of the time.  A reassuring takeaway for the longer term investor is that the market goes up in 75% of the years for the past eighty years.

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The number of unfilled job openings in November was the highest since March of 2008, indicating continuing strengthening in the labor market.  Job openings have been above the ten year average for over a year now.

The number of people who voluntarily quit their jobs continues to climb over the past year.  Employees quit when they feel more confident about job prospects. While this metric has been improving, it is only at the lowest levels of the past decade.

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Housing starts declined slightly in December to a million but is still growing from the lows of the bust.

Let’s get a bit of perspective. There is a decided shift downward from the post war building boom.  Below is a graph of  housing starts adjusted for population growth.

Adjusted for population growth, the multi-family component of housing starts has reached the normal levels of the past two decades.  This is the more stable component of housing starts.

Starts of single family homes have not yet reached the lows of past recessions.  The words “improvement” and “recovery” should be viewed in the context of these abysmal lows.

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The Consumer Price Index (CPI) for December showed a year over year increase of 1.5%.  I believe this understates current inflationary pressures on consumers but it is the official rate, one that the Federal Reserve will use to guide policy.  The low rate will help allay fears that continuing stimulus will spur inflation in the near term.

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Stock prices will be driven largely by earnings reports at this time.  About 10% of SP500 companies have reported this past week, too few to get a solid feel yet for the past quarter.  62% of companies have beat expectations, a bit less than the more normal 70%.  The market is largely trading sideways as it digests both the past quarter’s results and the forward guidance that companies give when they report.  IBM, Johnson and Johnson, and Verizon kick off this holiday shortened week when they report earnings on Tuesday. McDonald’s, Microsoft, Proctor and Gamble, and Netflix are due to report this week as well.  There don’t appear to be any significant market moving economic reports coming up this week.  Existing Home Sales on Thursday might have some minor impact and traders will be watching the continuing trend in new unemployment claims.

Year In Review

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January 5, 2013  2014

The start of any year presents an opportunity for reflection on the past year as well as the upcoming one.  At the start of the year, few, if any, analysts called for such a strong market in 2013.  The S&P500 closed the year at 1850, a 30% gain. After a correction in May – June of this year, the index rose steadily in response to better employment data, industrial production, GDP increases, and the willingness of the Federal Reserve to continue  buying bonds and keep interest rates low.

I was one of many who were mildly bullish at the beginning of the year but got increasingly cautious as the index pushed past 1600.  Yet, month after month came not only positive or mildly positive reports but a notable lack of really negative reports.  Leading economies in the Euozone, teetering on recession, did not slip into recession.  Fraying monetary tensions in the Eurozone did not explode into a debt crisis.  China’s growth slowed then appeared to stabilize.  Although the attention has been on the Eurozone the past few years, the sleeping dragon is the Chinese economy, its overbuilt infrastructure, the high vacancy rate in commercial buildings in some areas of the country and the high housing valuations relative to the incomes of Chinese workers.

A year end review is an exercise in humility for most investors.  Some fears were unfounded or events unformed which confirmed those fears.  People are story tellers – stories of the past, imaginings of the future.  An investor who keeps all their money in CDs or savings accounts is predicting an unsafe investing environment for their savings.

Perhaps the best strategy is the one that John Bogle, the founder of Vanguard, advocates.  He doesn’t try to predict the future or be the best investor.  He aims for that allocation of stocks, bonds and other investments that, on average, forms a suitable mix of risk and reward for his goals, his age and the financial situation of his family.  He looks at his portfolio once a year.  I do think that a good number of individual investors had adopted the same outlook as Mr. Bogle advocates – until the 2008 financial crisis.

Since the financial crisis, too many investors have adopted a paralyzed strategy, a “deer in the headlight” reaction to the financial crisis that has been hugely unrewarding. Part of this year’s rise in the stock mark can be attributed to individual investors moving cash back into the stock market but I would guess that many of those investors are ready to pull it back out at the first sign of any trouble.  This shows less a confidence in the market but a frustrating lack of alternatives.

Long term bond prices took a significant hit in the middle of the year on fears of an impending rise in interest rates.  Bond prices had simply become too high, driving down the yield, or return, on the investment. Lower bond yields and meager CD and savings rates provided little return for investors, leaving many investors with little choice but to venture back into the stock market.

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The Coincident Index of Economic Indicators remains level and strong.  A decline in this index below the 1% average growth rate of the population indicates the start of or an impending recession.

Note the index in 2002 – 2003 as it fell back, never rising above the 1% level.  I have written about this economic faltering before.  Much of the headlines were focused on the lead up to and start of the Iraq war.  The recovery from the recession of 2001 and 9-11 was very sluggish.  Fears that the country was entering a double dip recession similar to that of the early 1980s prompted Congress to pass the Bush tax cuts in 2003.  It was only the increased defense spending of 2003 that offset what would have been a decline in GDP and another recession.

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A worrisome rise in new unemployment claims has puzzled some analysts.  Typically, new claims for unemployment decline at the end of the year, particularly in a year such as this one when reports of strong economic growth have been consistent.  Since 2000, rises in claims at the end of the year have been a cautionary note of things to come.  Mid-term investors and traders will be paying attention to this in the weeks to come.

However, the decline this year may be more of a leveling process that has been forming for most of the year.  On a year over year basis, the long term trend is down – which is up, or good.

In March 2013, I wrote “when unemployment claims go up, the stock market goes down … On a quarterly basis, this negative correlation has proved to be a reliable trading signal for the longer term investor.  When the y-o-y percentage change in new unemployment claims crosses above the SP500 change, sell.  When the claims change crosses below the SP500 change, it’s safe to buy. ”  The percent change in SP500 is still floating above the change in unemployment claims.

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Sales of motor vehicles in November were above even the most optimistic expectations.  The ISM manufacturing index showed a slight decline but is still in strong growth mode and the already robust growth of new orders continues to accelerate.  The manufacturing component of the composite index I have been following since last June is at the same vigorous levels of late 1983 and 2003 when the economy finally breaks free of a previous recession.  I’ll update the chart when the non-manufacturing report is released this coming Monday.

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In a healthy economy, the difference between real GDP and Final Sales Less the Growth in Household Debt (Active GDP) stays above 1%, which incidentally is the annual rate of population growth.  As the chart below shows, this difference dropped below 1% in late 2007.  Finally, six long years later, the difference has risen above 1%, indicating a healthy, growing economy.

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And now a brief look at the year in review.

At the end of 2012, the price of long term bonds had declined slightly from the nose bleed levels of the fall but there was more to come.  I wrote “As this three decade long upward trend in bond prices begins to turn, bond prices can fall sharply as investors turn from bonds to stocks and other investments. We are approaching the lows of interest yields on corporate bonds not seen since WW2. Investors are loaning companies money at record low rates and companies are sucking up all that they can while they can. Sounds a lot like home buying in the middle of the last decade, doesn’t it?”

During the past year, long term bonds declined another 10%.  They seem to have formed a base over the past several months.  Intermediate term bonds are less sensitive to interest rate changes so they are the safer bet.  They lost about 6% in price over the past year.  Short term corporate bonds are a good alternative to savings accounts.  They pay about 1% above the average savings account and they usually vary very little in price so that the principal remains stable.

At the end of 2012, I wrote “the underlying fundamentals of the economy give reason for cautious optimism.” A month later, “As the saying goes, ‘The trend is your friend.’ When the current month of the SP500 index is above the ten month average, it’s a good idea to stay in the market.”  In January 2012, the monthly close broke above the 10 month average. This is a variation of the Golden Cross that I wrote about in January and February 2012.

Let’s look at this crossing above and below the 10 month average.    When this month’s close of the SP500 index crosses above the 10 month average of the index, it indicates a clear change in market sentiment.  I have overlayed the percent difference between each month’s close and the ten month average.

As you can see, the close near the end of December is near 10% above the 10 month average.  If the above chart is a bit too much information for you, here is a graph of the percent difference only.

Is the market overheated?  As you can see the market has sustained a robust (or some might call it exuberant) 10% for 6 – 9 months in 2003, 2009, and 2010-2011.  From 1994 to 1999, the market spent a lot of time in the 10% percent range. Some pundits are talking about this market as a bubble but we can see that this market has not penetrated the 10% mark.  At the end of January 2013, the market closed at more than 7% above it’s 10 month average, over the 4 year positive average of 5.6% (the average when the difference is positive).  The market is 20% up since then.

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In March I introduced the “Craigslist Indicator,” the number of work trucks and vans for sale in a local area, as a gauge of the health of the construction industry.  It was a funny little indicator that indicated a growing strength in the construction industry at the beginning of the year.  Now for the amended version of the Craigslist Indicator: when there are a lot of older work trucks and vans advertised for sale on Craigslist, that indicates a robust construction market.

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On March 24th, 2013 I wrote ” For the past year, the Eurozone has been in or near recession, yet some are hopeful that increased demand in this country and some emerging markets are helping to balance the contractionary influence of decreased demand in the Eurozone. Let’s hope that this surge in the first part of the year does not fade as it did in 2012.”  Instead, emerging markets began to contract and the Eurozone expanded slightly. Investors who bought emerging markets in March 2013 witnessed a more than 10% decline during the summer but the index ended the year at about the same level as nine months ago.

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I thought that home prices in the early spring has reached a peak and wrote on March 31st, “The upturn in home prices is still above the trend line growth of disposable income and until personal income can resume or surpass a 3% growth rate, any rise in home prices will be constrained.” The Purchase Only House Price Index (HPIPONM226S) rose steadily throughout the year.
In late summer, I noted the falloff in single family home sales that began in the spring.  But prospective buyers were incentivized to make the deal as interest rates began to climb from their historically low levels.  Home sales surged upward; a lack of inventory in many cities also formed a support base that propped up prices.

A sobering note in September, “Rising home values are good for those who own a home but increasing valuations make it that much more difficult for buyers trying to buy their first home.  People in their twenties and early thirties who are most likely to be first home buyers have been hit hard by the recession.”

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After a decline in the stock market in June, I wrote “For the long term investor, periods of negative sentiment can be an opportunity to put some cash to work.”  Although I took my own advice, I wished I had acted with more conviction.  Of course, if the market had declined 10%, I would have been patting myself on the back for my cautious stance.  Smiley Face!!

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In July I noted the rather dramatic decrease in the value of securities held at the nation’s largest banks “Recently rising bond yields have contributed to banks’  operating profit margins but the corresponding value of banks’ bond portfolios has fallen quite dramatically.  This decline in asset value affects bank capital ratios, which makes them less likely to increase their lending … [and] will be an impediment to economic growth.”  The rising stock market and a respite in the decline of bond prices helped stabilize those portfolios in the second half of the year.

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In September, I noted “Despite all the daily and weekly responses to political as well as economic news, the SP500 stock market index essentially rides the horse of corporate profits.”  Profits have more than tripled in the past ten years.  We should stay mindful of that stock price to profit correlation as we look out on the investment horizon.

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From time to time I comment on the venality of our elected representatives.  Although they might appear to be idle rants to some readers, they are a caution.  Politicians make promises to get votes.  People become more dependent on those promises.  Inevitably, the day comes when the promises can not be met – as promised.  Those nearing or in retirement become increasingly dependent on political promises and should leave themselves a cushion – some wiggle room – if possible, when they make income and expense projections.  This Washington Post article on proposed budget cuts to military pensions is a case in point.  As long as “they” come for the other guy, we don’t pay too much attention – until they come for us.  Over the next ten to twenty years, we can expect many small cuts to promised benefits.  The cuts have to be small or target a small sector of the population so that they don’t anger voters too much.  In several blogs, I have shown how a simple recalculation of the Consumer Price Index eats away at the incomes of workers and retirees.  Expect more of these “recalculations” in the future as politicians follow a long standing tradition of making promises to win votes and bargain patronage to gather financial support for their campaigns.

We have the midterm elections to look forward to this year!  OK, calm down. Republicans will be hoping to take the Senate and make President Obama’s life miserable for the following two years.  I am guessing that the political campaigns for some Senate seats will vacuum in more money than the GDP of a lot of small and poor countries.

Employment Growth

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December 29th, 2013

In several past blogs here and here, I have noted a “rule of thumb” guide to recessions based on the unemployment rate.  When the year over year percentage change in the unemployment rate goes above 0, recession smoke alarms go off.  Sorry, no phone app for this alarm. This metric sometimes indicates a recession that doesn’t quite materialize in the economic data, a false positive, although the market may react to the possibility of a recession.  Employment is but one factor in a complex economy and no one indicator can stand as a fail safe predictor of a serious enough decline in the economy that it gets labelled “recession” by the NBER.

Another related measure is the total employment level.  This employee count comes from the Establishment Survey conducted by the BLS and is the source for the monthly headline job gains or losses. To show the correlation between payroll and economic activity, I took a measure of GDP – I’ll call it active GDP – that excludes changes in business inventories and net exports.  From this I subtracted the change in real household debt in each quarter.  This measure of economic activity reflects what consumers can actually pay for.  Below is a chart of the yearly change in this adjusted measure of GDP and the number of people working.  There is a remarkable correlation.

As I will show below, the employment market has not fallen into an unsafe zone but the decline in growth of domestic demand indicates a fragility that should not be overlooked.  Comparing the number of people working to the 12 month average reveals trends and weaknesses in the economy.  Historically, when the number of workers falls below its 12 month average we are almost certainly in a recession.  As of now employment is maintaining a healthy but not robust growth rate.

When the difference between the monthly count of people working and its 12 month average (I’ll call it DIFF) falls below 1% (I’l call it WEAK), it shows a pre-recession weakness in the economy. In past decades, this DIFF might fall to .75% before recovering, a temporary weakness.  Since June 2000, employment growth has been in a WEAK state, never recovering above 1%.  Following the dot com bust in 2000, 2001 included an 8 month recession, the admittance of  China to the World Trade Organization and the sucking up of low skilled manufacturing jobs, and the horrific events of 9-11.  For two years the country endured a painfully slow and fitful recovery, prompting a Republican Congress to pass  what are called the Bush tax cuts.  Neither tax cuts or the overheated housing market of the mid 2000s could kick the DIFF above 1% although it got very close for a number of months in late 2005 and early 2006 as the housing market peaked.

When the DIFF falls below 500, we can mark fairly closely the beginnings and ends of recessions as they are called by the NBER many months later.

It is important to note that historical data is already revised data.  We must make investment decisions with the data available at the time. (See an earlier blog for some examples of revisions to payroll data.)

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This week’s reports were generally better than expected.  These included durable goods orders, sales of new homes, personal income and spending.  Housing prices, as shown by the FHFA purchase only index, are maintaining an 8% year over year change.  Over the past quarter century, housing prices have followed a 3.2% annualized growth rate.

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In previous blogs, I have examined the PCE inflation measure that routinely produces the lowest rate of inflation.  This is not the headline CPI index but is used to produce what is called a chain type price index.  Inflation estimates based on this indicator showed 0% inflation in November and less than 1% for an entire year.  Isn’t that great?  Rents, food, utility bills, insurances have barely increased over the past year.  Yes, I know you are ROFL until you realize that the joke is on you, on all of us.

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Let’s get in the wayback machine and go back to early 2007 when the Bush administration released their estimate of GDP for the years 2007 – 2013.  Every Presidential budget indulges in the folly of predicting the future economic growth of the largest economy in the world.  When we dig into the figures, the process is rather simple.  These estimates simply take actual figures from 2006 and calculate 5% annual growth in nominal GDP.  Any of us could do this with an Excel spreadsheet.   An unemployment rate below 5% is rather infrequent and unlikely to continue for very long but the Bush Administration projected that this sub-5%level would continue for another six years.  If your 12 year old came to you with these calculations, you would probably praise them for their effort and smile inwardly at the innocence of the projections.  You wouldn’t tell your twelve year old that things don’t stay rosy indefinitely because they will find that out in due time.  This kind of middle school mentality is what passes for wisdom in Washington.

In the course of our lives, how many times do we come to a carefully calculated answer only to step back and say “Well, that can’t be.  Something’s wrong.”  It seems that there are few in Washington who doubt themselves.  The polarization in Washington means that everyone in any position of responsibility has many critics on the other side of an issue.  Each one then surrounds themselves with others who support their position, their values, their calculations.  There is no stepping back and saying, “Wait, is that right?” The revolving door in Washington ensures that many politicians have little to lose even if they lose their seats.  Many soon find an even more lucrative position in the private lobbying industry.  What they do lose is the ability to wake up in the morning, look in the mirror and say, “I’m important.”  Lose a bit of arrogance, gain a bit of humility.  Not such a bad tradeoff.

The investor who puts his own money at risk, who has skin in the game, as the economist Nassim Taleb calls it, can not afford to NOT step back and take a second look at their investment strategies and allocations.  As we complete another lap, this is a good time to recheck and rebalance.  The 25+% gains in the stock market have probably skewed the allocations of many an individual’s portfolio.  Here’s hoping everyone has a good year!

Investment Allocation and Housing

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December 1st, 2013

While cleaning up some old files, I found a 1999 “Getting Going” column by Jonathan Clemens in the Wall St. Journal.  That year was rather turbulent, rocked by Y2K fears that the year 2000 might play havoc with older computers still using a two digit date,  and a intensifying debate about the valuation of stocks.  Looking away from the hot internet IPOs of that year,  Clemens interviewed several professors about the comparatively mundane subject of home ownership.

 “A house is not a conservative investment,” says Chris Mayer, a real-estate professor at the University of Pennsylvania’sWharton School. “Any market where prices can fall 40% in three years is not a safe investment.” 

Remember, this is 1999.  At that time, what 40% decline is he talking about?  It would not be till 2009 or 2010 that house prices tumbled down the hill.  In the past, declines of this magnitude were confined to particular areas of the country where a fundamental shift  in the economy occurred.  The Pittsburgh area of Pennsylvania, the Pueblo area of Colorado and the Detroit area of Michigan come to mind. In the first two examples the collapse of the steel industry had a profound effect on home prices as people moved to other areas to find work.  In case a homeowner thinks “it can’t happen here,” I’m sure many homeowners in Detroit felt the same way during the 1960s when the car industry was at its peak.

“William Reichenstein, an investments professor at Baylor University in Waco, Texas, suggests treating your mortgage as a negative position in bonds.”  

What does this mean?  Let’s say a person has $100K in stock mutual funds, $100K in bond mutual funds, owns a house valued at $200K with $100K still left on the mortgage.  Subtract the remaining balance of the mortgage from the amount in bonds and that leaves $0 invested in bonds.  Why do this?  When we buy a bond we are buying the debt of a company, or some government entity.  A mortgage is a debt we owe.  So, if a person were to pay off the mortgage, trading one debt for another, they would sell their bonds to pay off the mortgage.

Should the house be included in the investment mix?  There is some disagreement on this.  An investment portfolio should include only those assets which a person could access for some cash flow if there was a loss of income or some other need for cash.  An older couple with a 5 BR house who intend to downsize in five years might include a portion of the house in the portfolio mix.

For this example, let’s leave the house out of the investment portfolio to keep it simple. Using this analysis, this hypothetical person has 100% of their assets in stocks, not a 50/50 mix of stocks and bonds.

Now, let’s fast forward ten years from 1999 to 2009.  An index mutual fund of stocks has lost a bit more than 20%.

A long term bond fund has gained about 100%.

[The text below has been revised to reflect the above bond fund chart.  The original text presented numbers for a different bond fund.]

Let’s say the mortgage principal has been paid down $60K over those ten years.  Assuming that no new investments have been made in the ten year period, what is this person’s investment mix now?  The stock portion is worth $80K, the bonds $200K less $40K still owed on the mortgage for a total of $240K, with a net exposure in bonds of $160K.  The person now has 33% (80K / 240K) in stocks and 67% in bonds, a conservative mix.  If we didn’t account for the mortgage as a negative bond, the mix would appear to be 29% (80K / 280K) for stocks and 71% for bonds.  What is the net effect of treating a mortgage balance as a negative bond?  It reduces the appearance of safety in an investment portfolio.

Now let’s imagine that this person is going to retire and collect a monthly Social Security check of $1500.  To get a 15 year annuity paying that monthly amount with a 3% growth rate, a person would have to give an insurance company about $220K (Calculator)   There are a lot of annuity variations and riders but I’ll just keep this simple.  Throughout our working lives our Social Security taxes are essentially buying Treasury bonds that we start cashing out during retirement.

If we were to add $220K to our hypothetical investment mix,  we would have a total of $460K: $80K in stock mutual funds, $200K in bond funds, -$40K still owed on the mortgage, $220K effectively in Treasury bonds that we will withdraw as Social Security payments.  The $80K in stock mutual funds now represents only 17% of our investment portfolio, an extremely conservative risk stance.  If we have a private pension plan, the mix can get even more conservative.

The point of this article was that many people in their 50s and 60s may have too little exposure to stocks if they don’t account for mortgages, pensions and Social Security payments into their allocation calculations.

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In October 2005, the incoming Chairman of the Federal Reserve, Ben Bernanke, indicated to Congress that he did not think there was a bubble developing in the housing market. (Washington Post Source)

In September 2005 – a month before – the Federal Reserve Bank of New York published a report on the rapid housing price increases of the past decade:

Between 1975 and 1995, real [that is, inflation adjusted] single-family house prices in the United States increased an average of 0.5 percent per year, or 10 percent over the course of two decades. By contrast, from 1995 to 2004, national real house prices grew 3.6 percent per year, a more than seven-fold increase in the annual rate of real appreciation, and totaling nearly 40 percent in one decade. In some individual cities, such as San Francisco and Boston, real home prices grew about 75 percent from 1995 to 2004, almost double the national average. 

Remember, these are real, or inflation adjusted prices.  Now it is easy, in hindsight, to go “ah-ha!” but it should be a lesson to us all that we can not possibly hope to consume all the information needed to mitigate risk.  There is just too much information.  A professional risk manager, Riccardo Rebonato, discusses common flaws in risk assessment in his book “Plight of the Fortune Tellers” (Amazon). Written before the financial crisis, the book is surprisingly prescient.  The ideas are accessible and there is little if any math.

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On Monday, the National Assn of Realtors released their pending home sales index. These are signed contracts on single family homes, condos, and townhomes. The index has declined for five months but is still slightly above normal (100) at 102.1.  At the height of the housing bubble, this index reached almost 130.  At the trough in 2010, the index was below 80.

This chart was clipped from a video by an economist at NAR (Click on the video link on the right side of the page).  The clear and simple explanation of trends in housing and interest rates is well worth five minutes of your time.  Sales of existing homes have surpassed 2007 levels and are growing.

Demographia surveys housing in m ajor markets around the world and rates their affordability.  Their 2012 report found that major markets in the U.S. are just at the upper range of affordable.  As Canada’s housing valuations have climbed, their affordability has declined and are now less affordable than the U.S.  Britain’s housing is in the severely unaffordable range.

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Next Friday comes the release of the monthly employment report.  I’ll also cover a few long term trends in manufacturing and construction employment that may surprise you.

Retail, Housing, The Fed And More

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Last week I pointed to several contradictory outlooks for sales in the upcoming holiday season.  Bill McBride at Calculated Risk has several charts on the import and export volume at the port of Los Angeles.  The import data indicates that businesses were buying goods in late summer and the fall in anticipation of a good holiday season.  Both Home Depot and Best Buy reported better than expected earnings on Tuesday but Best Buy’s sales were less than expected.  The company cited increasing pressure from online retailers.  E-Commerce continues to take an ever increasing share of the retail sales market.

Amazon is now making more money selling other vendors’ products than it does its own.  Vendors typically turn over much of the sales, shipping and billing process to Amazon.  Businesses, including mine, are increasingly turning to Amazon for parts or supplies.  Why?  Amazon has become an easy to search portal for so many vendors and the prices are competitive.  Why spend time searching the web for long discontinued parts when Amazon has already done that?  What is even more surprising is the enormous volume of third party items that Amazon now stocks and, surprisingly, the items are received from Amazon, not the vendor.

On Wednesday, the monthly report of retail sales showed a .4% month on month gain, causing analysts at Morgan Stanley to reverse their earlier dour opinion of the coming holiday season.  The year over year gain is at 4% but retailers that target lower income consumers are experiencing some difficulties.  J.C. Penney reported sales and earnings that were disappointing.  After an earlier upbeat report from the home improvement chain Home Depot, Lowe’s reported strong sales and earnings, confirming the continuing strength in this sector.  Later in the week, Target issued a disappointing earnings report.  Will the ongoing decline in gas prices leave working class families with enough extra cash in their wallets this Christmas season?  Wal-Mart, Target and J. C. Penney hope so.

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[Revised to clarify the two separate housing indexes below]

 October’s housing market index reading of 54 from the National Assoc of Homebuilders indicated continuing strength in the new home market.  This index is a composite of factors, including sales, inventory, builder expectations and traffic.  The series, like the industrial reports, is indexed so that 50 is the neutral mark, indicating no net growth.  Although the overall index has declined from the summer peak, both sales and expectations are in the strong to robust growth.

The Federal Housing Finance Agency tracks an index of home prices (only).  Major markets on both the east and west coasts are still below the bubble peaks of 2005 – 2006.

From 1983 to 1999, the average house cost 13 to 15 years worth of rent.  This baseline is a good rule of thumb when pricing out houses.  In 2006, at the height of the housing bubble, houses were selling for 25 years worth of the average monthly rental.  Los Angeles experienced a much greater price inflation during the 2000s than either SF or NYC.  Although the nationwide economy is growing steadily but slowly, Los Angeles has responded to the strong growth in manufacturing throughout the country. Asking rents for industrial properties in L.A. are rocketing upward this year, accelerating from the strong three year growth and exceeding the price levels of 2007.

http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=2&PropertyTypeID=40&ListingType=LEASE&PropertyType=Industrial&TrendType=Asking%20Rent Available Office and Industrial property in the LA area is at multi-year lows.

http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=5&PropertyTypeID=80&ListingType=LEASE&PropertyType=Office&TrendType=No.%20of%20Spaces

Los Angeles, CA Market Trends

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http://www.loopnet.com/xNet/MainSite/Tools/WidgetHTML.aspx?WidgetType=50&CountryCode=US&StateCode=CA&State=California&CityName=Los+Angeles&SiteID=1&TrendTypeID=5&PropertyTypeID=40&ListingType=LEASE&PropertyType=Industrial&TrendType=No.%20of%20Spaces
The Consumer Price Index released Wednesday showed a tiny decrease in inflation for the month.  The year over year change was 1.7%, indicating that demand at many levels is positive but weak so that there is little pressure on prices.  On Thursday, the Producer Price Index (PPI) confirmed that the supply chain is experiencing very low upward pressure.

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The PMI Flash Index, a preview of the upcoming report on the manufacturing sector, confirmed the continuing growth in the manufacturing sector.

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The Job Openings and Labor Turnover Survey (JOLTS) by the BLS was released on Friday.  Unlike the timeliness of the monthly Employment report, this one lags by a month but does provide a more comprehensive analysis of the growth or decline in the labor market.  The BLS surveys employers at the end of the month, September in this case, for job openings and layoffs.  A job opening can be full time, part time, seasonal or temporary so the data can be skewed by seasonality factors.  The longer term trend, though, is apparent.

It may be several more years before job openings reach the level attained during the tech boom of the late ’90s.  Like the gold fever of the mid-19th century, investors poured money into a lot of ventures with little more than a napkin sized business plan.  This pattern of bubble and bust is fairly typical when game changing technologies emerge.  The spread of the telegraph and railroads led to horrific recessions in the late 19th century, culminating in the depression of 1893-94.  The rise of radio in the 1920s prompted speculative fever that contributed mightily to the crash of 1929, setting the stage for the bad monetary policy and haphazaard fiscal policies that fed the depression of the 1930s.  In the 1960s, a rush of investment in airlines and war funding helped fuel a frenzy of speculation that crashed in 1970.

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In Washington this week, the Senate voted to change the rules for Senate confirmation of most executive and judicial appointments, the so called “nuclear option” that requires only a majority vote for confirmation.  This modification of the filibuster rule should have been done ten years ago when then Democratic Senate Minority Leader Tom Daschle led filibusters to block many of George Bush’s appointments.  Since then, the Senate has grown ever more dysfunctional, incapable of even ordering pizza.  Under the elitist filibuster rules, each Senator could act like a despot or one of the “Knights who say ‘Nee’!” in the comic movie “Monty Python and the Holy Grail.”  A Senator representing 300,000 people in Wyoming could nix or delay an executive appointment – this in a country of over 300 million. Sounds a bit like England in the 1770s. A lot of people died in the Revolutionary War so that America would not be a country ruled by a despot, be it a king or a Senator.

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The rule change makes the confirmation of Janet Yellen as the next chair of the Federal Reserve a near certainty. In a speech at the Cato Institute’s Annual Monetary Conference, Charles Plosser, President of the Philadelphia branch of the Federal Reserve, made a good case for some restraint by the Federal Reserve – not in the amount of debt the Fed purchases but the type of debt:

“[The Federal Reserve’s] purchase [of] specific (non-Treasury) assets amounted to a form of credit allocation, which targets specific industries, sectors, or firms. These credit policies cross the boundary from monetary policy and venture into the realm of fiscal policy.”

Mr. Plosser would rather see politicians, not central bankers, decide which industries to favor through bailouts or loan purchases.  In a democratic republic like ours, if the politicians in Washington want to bailout banks or the housing sector, they can do so by issuing general debt obligations, Treasuries, which the Federal Reserve can buy.  Gridlock in Washington has prevented them from reaching any consensus about these policies, leaving it up to the Federal Reserve to act in their place, to make political decisions which compromises the neutral stance that a central bank should have.

Now, we might say that the result is the same so what’s the big deal?  Knowing that Fed chairman Ben Bernanke would come to the rescue has allowed politicians to not make difficult compromises.  Why should they?   If Congress does less, the Fed does more.  Because it can be so difficult to enact their agenda through the political process, Presidents and political parties turn to the Fed as the fourth branch of government.

Plosser also questions the dual target of both inflation and unemployment that the Fed has assumed as its mandate.  The law states that the Fed should enact monetary policy that is “commensurate” with the “long run potential to increase production.”  Since the recession began in 2008, the Fed has adopted a series of “QE” short term measures designed to decrease unemployment and Plosser’s view is that these are not part of the job description.  Plosser will be a voting member in 2014.  His vote of restraint is unlikely to hold much sway with Janet Yellen, who is ready to keep the cornucopia money machine flowing.

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In the Wall St. Journal’s Washwire Blog, Elizabeth Williamson writes that the White House is conducting a self-assessment in the wake of the health-law launch, “recognizing that administration officials missed warning signs and put too much trust in their management practices.”   What on earth has given this administration any reason to trust their management practices?  Was it their management of the attack on the U.S. consulate in Benghazi in September 2012?  Or perhaps the “red line” that President Obama drew with Syria, promising a military response if Syria used chemical weapons against its own people?  Or the terribly mismanaged mortgage relief program, HAMP, that former Treasury Secretary Tim Geithner put in place?

This is only a partial list of the persistently poor management practices that have marked this administration.  It began with the poor preparation in advance of the March 2009 meeting with the nation’s largest banks, leading Obama and Geithner to offer generous terms to the banks when the banks would have accepted any terms in order to stay alive.  The crafting of the stimulus bill was an example of indecisive leadership and management at one of those rare times in history when both houses of Congress were controlled by the President’s party.  Using a basketball analogy, the administration blew a layup.

Now comes the news that the Obama administration wants to exempt some union health care plans from a “reinsurance tax” – about $63 per person per year – that all plans under the ACA health care law pay.  How will they do this?  By a carefully worded exemption that applies only to self-administered health plans.  A little background.  Many big companies self-insure and hire an administrator like Blue Cross to take care of the details.  Under the Taft-Hartley act passed after World War 2, employers often in the same industry may collectively construct or join what is essentially a health insurance trust, offering their employees insurance through the trust.  These plans are called “Taft-Hartley Multi-employer Health and Welfare Plans” and are really a benefit in the construction trade because they enable smaller employers to offer employees – usually these are unionized employees – a health plan at more affordable rates, taking advantage of the larger pool of insured offered by the trust.  It also enables employees to move from one company to another and retain their health insurance.  The plans are defined as self-administered even though the trust may contract out the details of daily management to a third party.   So here is a plan that fills a need and offers a benefit to both employers and employees.  Labor unions, like everyone else, want special treatment, of course, so they have been lobbying for an exemption from this rather small tax.  In September the Huffington Post reported that the unions were having little success in lobbying for another exemption – the ability of these plans to qualify for subsidies as though they were individual health care plans.

With a history of spineless leadership from an Obama administration that can’t say no but can’t say yes either, unions will continue to press for special treatment.  Finally, even they may get disgusted with an administration that can’t take a stand.

Like the Durango-Silverton narrow gauge train, the stock market chugs up the hill.  Production, sales and employment reports are either strong or not too bad or neutral but not bad.  Short, mid and long term volatility measures are subdued.  Gold has been drifting steadily down, nearing the lows of July.  Of course, some say that the time to get worried is when no one is worried.

The biggest worry for many in the coming week may be a dry turkey, or a heated discussion about politics.  Do pass the sweet potatoes if asked even if that so-and-so relative of yours is dumber than the potato.  Happy Turkey Day!

Shoot Out At the OK Corral

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October 20th, 2013

This coming Saturday is the 132nd anniversary of the gunfight at the OK corral.  We got our own OK corral in Washington and there was a whuppin’ this week – a Washington style whuppin’, which means that no one got whupped but everyone agreed on an appointment date for a  future whuppin’.

Congress passes a continuing budget resolution with the same frequency that many of us get our teeth and gums cleaned.  Many government reports were not released this past week but the National Assoc of Homebuilders (NAHB) released a very positive monthly report of the national housing market, showing a slight decline over the past few months last month but still a strong index reading of 55.  Two years ago this October, that index stood at 15.  In fact since the latter part of 2007, the index oscillated in the range of 15 – 20, so this has been a strong and sustained growth surge.

Over the past hundred years, house prices have risen at about the same rate as inflation, so that the real price of homes stays about the same.  Most homeowners finance their home purchase and it is this interest cost that determines the total capital cost of the home.  That capital cost and the interest cost is divided over the life of the mortgage into monthly payments.  PITI is a familiar acronym to many home owners and buyers; the initials represent the components of a monthly house payment. The ‘P’ stands for Principal – the monthly capital cost of the home.  The ‘I’ is interest on the amount of the loan.  The ‘T’ represents the local real estate taxes which are included in the monthly house payment sent to the mortgage servicer who forwards them on to the local taxing agency. The ‘I’ represents Insurance.  This can be both house insurance and, for those with an FHA loan, the amount of the loan insurance.  The interest rate on the home loan is a key component and although there has been an increase in mortgage rates since the spring, they are near all time lows.  A 30 year mortgage is a common benchmark.

Let’s index the CPI and the house price index to 1991 and look at the divergence.

Declining interest rates have enabled many more people to qualify for a home purchase, thus driving up home prices. In 1995, Congress made some major revisons to the 1977 Community Reinvestment Act, making home loans more available in distressed urban and rural districts.  This further exacerbated the rise in home prices, creating a large divergence between the CPI and the housing price index.

As every homeowner knows, the cost of a home includes maintenance, repairs, utilities, and improvements.  As I discussed last week , real median household incomes plateaued during the 2000s.  The rise in home values and changes in banking laws enabled homeowners to tap the equity in their homes to meet these additional obligations and to augment stagnant incomes.

In the past dozen years, many people discovered that housing is not a reliable source of income.  At the turn of the century, stock traders who quit their jobs to trade stocks during the tech bubble, discovered the same truth about the stock market, whose price returns are a few percent above inflation.  A nifty calculator at  DQYDJ illustrates the average returns of the SP500 over the past 100 years.

 

At the heart of the financial follies of past centuries is that a surge in price for some asset, be it tulip bulbs, Florida real estate or tech stocks leads people to conclude that they can hop on the gravy train.  What is the gravy train?  As an asset increases in value, more people invest in the asset bubble, the valuation continues to rise and – for a time – it is possible to convert a stock, a store of value, into a flow of income by either buying and selling the asset or borrowing money against the asset.  There is always some constraint – the rise of inflation, or the rise of personal incomes, or the growth rate of profits – that eventually brings an asset valuation down to earth.  Einstein famously quipped that the most powerful force in the universe was compound interest.  He might have mentioned  what may be the most powerful force – reversion to the mean.

Home Sweet Home

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September 22nd, 2013

The monthly report of new housing starts was released Wednesday morning, the second day of a much anticipated meeting by Federal Reserve. On an annualized basis, builders started 891,000 homes, a 19% year over year increase. This figure includes both single family homes and apartment buildings. Starts were below expectations and may cause some Fed officials to postpone or soften their quantitative easing program.  (Note:  later that day, the Federal Reserve announced that they would not start tapering their bond buying program, a surprise that spurred a surge upward in the  stock market)

A 19% increase sounds great until we take a birds eye view of housing starts.

The 5 month average of housing starts has been declining since the spring. A decline in the volume of new homes sold is an early warning of recession.  Builders are motivated sellers and respond to changes in demand.  Because builders borrow money, called “bridge” loans, to manage their cash flow they are motivated sellers and respond more readily to changes in demand.

 

A common metric heard on the nightly news is the months supply of new homes for sale.  This is the inventory of new homes in a particular area.  More months is bad, less months is good but too little inventory puts upward pressure on prices.  New home inventory is low.

The months supply is a ratio of home sales to starts and can be misleading. The components of housing starts and sales tell another story.  Starts indicate confidence of builders in future home sales in their region. A thirty year graph of new one family homes started less one family homes sold shows a deep underlying caution among builders.  They got burned in this last downturn and are not sticking their necks out.

As the population grows, people need to live somewhere.  Below is the number of new privately owned housing starts per 1000 increase in the population.

This graph tells a different story than the usual “too many houses built” narrative.  The height of the 2000s boom was less than the heights of the 1970s and 1980s.  There were not too many houses being built but too many houses being bought by people who could not afford them.  Mortgage companies sold adjustable financing products designed to earn fees when homeowners refinanced every few years to avoid large interest rate increases.  Buyers were enticed by a hop-on-the-gravy-train mentality as housing prices rose dramatically, particularly in low income areas.

After the 2000 census, the Census Bureau summarized decades long shifts both in the type of housing and the characteristics of homeowners.   While there is a wealth of 2010 census data, I was unable to find a similar table that incorporated data from the recent census.  The Census Bureau notes that privately held housing starts do not include mobile homes, which grew to 7.6% of the housing stock in this country.   So the surge in housing per change in population of the 1970s and 1980s is understated.  This suggests that the new home market is not overbuilt but that people are less able or less willing to commit to owning a home than they were thirty and forty years ago.

Sales of existing homes, released Thursday, showed a recovery high of almost 5.5 million units on an annualized basis.  Realtors reported continuing strong demand in anticipation of rising mortgage rates.  The “churn” of existing homes is not a productive investment in and of itself since the home has already been built.  Sales in this category do generate fees for banks and realtors at the time of sale, and increased sales for Home Depot and remodelers as buyers remodel following the sales or sellers spruce up homes before they put them on the market.

The ratio of new spending per existing home is very small compared to the material and labor involved in building a new home.  The brisk pace of existing home sales does raise the valuation of existing homes, which leads people to feel that they are wealthier, which may induce them to loosen their purse strings.  Rising home values are good for those who own a home but increasing valuations make it that much more difficult for buyers trying to buy their first home.  People in their twenties and early thirties who are most likely to be first home buyers have been hit hard by the recession.

As the economy continues its muddling recovery and home prices rise, does this generation practice a stoic resignation as they look to the future?

Crises

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September 16th, 2013

September marks two anniversaries that we wish had not happened.  One of those is the financial crisis and the meltdown of the economy in September 2008.  In the fourth quarter of 2008, GDP fell about $250 billion.  By itself, this was not a disaster.  However, it came on the heels of a decline in the 2nd quarter and flat growth in the 1st quarter.

Almost overnight, consumers cut back on their spending.  Retail sales dropped $40 billion, a bit more than 10%.

There was little drop in food sales – people gotta eat.  All of the drop was in retail sales excluding food.

Retail sales are less than 3% of GDP.  Contributing to the GDP decline was the 33% fall in auto sales, about $20 billion.

Offsetting the decline in retail sales, however, total Government spending increased $40 billion in the 4th quarter.

Disposable Personal Income (income after taxes) fell $100 billion, about 1%, but was still on a healthy upward trajectory during the year preceding the crisis.

We routinely import more goods and services than we export.  In the national accounts of domestic production, imports are naturally treated as a negative number, while exports are positive. The difference, called net exports, is negative and reduces GDP.  For all of 2008, we had about the same net exports as 2007.

Gross Private Domestic Investment declined $200 billion or 9% over the year.  This includes investments in buildings, equipment and housing.  Housing accounted for $150 billion of the change.

The TV news media, a visual medium, focuses on crises because it is not well suited for more thoughtful analysis.  On camera interviews in a crisis do not have to be very detailed or accurate.  Viewers understand that it is a crisis.  But viewers are also an impatient bunch with trigger fingers on their remote controls. Video footage has to be loaded, sequenced and edited.  On air interviews and several short video clips run repeatedly during a news hour will have to do.  The recent flooding in Colorado is a reminder that there is only so much video footage available.  TV stations simply reran the same sequences over and over.  On the 9 PM local news, the station featured an on site reporter in front of a driveway heaped full with damaged belongings and furniture.  At 10 PM, a different local station featured their reporter in front of the same house.

In September 2008, the media focused on the financial crisis and the implosion of stock prices.  When the stock market opens up on a September morning 300 points down, what else is there to cover?  It is important to understand that the economy is a big organism with a lot of moving parts.  The housing decline was already two years old before the financial crisis hit in September 2008.

Fast forward to this September.  A day ahead of the ISM Manufacturing report on September 4th came the news that China’s manufacturing sector has strengthened, a positive note in the Asian region where capital outflows from emerging nations have weakened the economies of other nations.  The prospect of higher interest rates in the U.S. has sparked a change in money flows to the U.S., strengthening the dollar against the currencies of emerging countries.  This change in flows promises to put pressure on companies in developed nations who had earlier borrowed money in U.S. dollars to take advantage of low interest rates.  The stream of capital follows the deepest channel.  The combination of risk and reward in each country can largely determine the depth of the channel.  Countries can, by central bank policy or law, control the flows of foreign investment into and out of their country.  China and India exercise some degree of control in an attempt to maintain some stability in their economies.  Like other developed nations, the U.S. has few controls.  In the run up of the housing bubble, foreign flows into the U.S. provided the impetus for investment banks like Goldman Sachs to initiate and bundle many thousands of mortgages into tradable financial products that met the demand by foreign investors.

Manufacturing data in the Eurozone was a big positive with several countries recording their strongest growth in over two years.  The Purchasing Managers Indexes (PMI) are not strong but are showing some expansion, a turn about from the slight contraction or neutral growth of the past two years.   The fragile economic growth of the Eurozone has been exacerbated by the concentration of growth in France and Germany, particularly Germany.  Recent strong gains in some of the peripheral countries, those in the former Communist bloc and southern Europe, suggest that economic activity is becoming more dispersed.  Dramatic differences in the economies of countries that share the same currency make the setting of monetary policy difficult and it is hoped that more even growth will take pressure off central banks in the Eurozone.

At an overall reading of 55.7, the ISM Manufacturing report released a week ago Tuesday showed even stronger growth than the previous month’s index of 55.4.  50 is the neutral mark that indicates neither expansion or contraction of manufacturing activity.  New orders began a worrisome decline in  the latter part of 2012 that persisted into the spring of this year, and the turnaround of the past few months forecasts a healthy manufacturing sector for the next several months.  Levels above 60 in any of the components of this index indicate robust growth;  both new orders and production are above that mark.

A few days later ISM reported their Non-Manufacturing composite was 58.6, indicating strong expansion in service industries which make up the bulk of the economy.  The Business Activity index came in at a robust 62.2.  ISM also reported that their figures for June had an incorrect seasonal adjustment.  The New Orders Index for June was revised up a significant 2%.  Prices were revised up 4.3%.  Other changes were relatively insignificant.

The constant weighted index I have been tracking smooths the ISM data so that it responds less strongly to one month’s data but it is showing strong upward movement in both manufacturing and non-manufacturing.

The Commerce Dept reported last Friday that Retail Sales continue to grow at a modest pace.  However, let’s look at retail sales as a percent of disposable income.  Consumers are still cautious.

Speaking of disposable income.  As we import more and export less, disposable income as a percent of GDP continues to rise.  This percentage rises sharply at the onset of recessions.  It is a bit troublesome that the 40 year trend is rising.

Home Sweet Home

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March 31st, 2013

From its catatonic state the housing market continues to make headlines.  On Tuesday came a somewhat disappointing report on new home sales for February; at 411,000 it was a bit below expectations of 425,000.   A real estate saleswoman told me this week that it’s now a seller’s market in Denver.  I presume that means that buyers are now having to offer the asking price or above when submitting a sales contract to a seller.

For a long term perspective, let’s zoom out fifty years.  Home sales are at past recession bottoms BUT they are better than last year and the year before and the housing and labor markets are hoping.

Will the patient stir, starting to rise, only to fall back on the bed?  PUH-LEEZ DON’T!

Housing Starts, which include multi-family dwellings, are on an upswing but are also coming from a deep trough.

What is more telling for the labor market is the ratio of home sales to housing starts, which continues to decline as more and more multi-unit apartment buildings and condos are being built.

Construction of multi-unit dwellings takes less labor per family unit and the type of construction is often skewed to a different kind of labor force than the construction of single family homes.  There is more steel, concrete and masonry work in multi-unit construction, employing trade skills unfamiliar to some in single family residential construction.  This shifting emphasis of skills in the work force may damper growth in the construction labor market.

Let’s go up in our hot air balloons and take a gander at home valuation for the past 130 years.  The Case-Shiller Home Price index surveys home prices throughout the nation and adjusts for inflation.  The homes of today offer more than the homes of 100 years ago, both in convenience, comfort and safety.  However, the index is approaching an upper range that may be less attractive to potential buyers.

Let’s look at housing evaluations from an affordability perspective.  The National Association of Realtors offers an affordability index based on a composite of mortgages.  I prefer a different measure, one that is based on disposable income – income after taxes.  For many of us, buying a house is the biggest purchase of our lives.  Before we make such a big commitment, we need to have some savings (except during the housing boom) to make a down payment, and we need to feel some certainty about our future income.  Mortgage payments will probably take the largest bite out of our income.  

When we look at a long term history of the growth of the home price index (purchases only) and the growth of inflation adjusted disposable income, they track each other closely – until the housing boom really took off in 2000.  Below is a graph of the past 20+ years, showing the relationship between the two.

 

The upturn in home prices is still above the trend line growth of disposable income and until personal income can resume or surpass a 3% growth rate, any rise in home prices will be constrained.

Blossoms and Blight

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March 24th, 2013

The Blossoms

There have been a number of encouraging reports these past several months, helping to fuel new highs in the popular SP500 stock index.  After falling off dramatically five years ago, real (inflation adjusted) retail sales finally surpassed 2007 levels.

Housing prices around the country are on the mend.  Although the purchase only home price index is still below the vaulted levels of the bubble years, it is exactly where it would have been if there had been no bubble and housing prices had grown at their customary 3 – 4% per year.

In recent months, the manufacturing sector of the economy has surged upward, rebounding from weakness in the latter part of 2012.  For the past year, the Eurozone has been in or near recession, yet some are hopeful that increased demand in this country and some emerging markets are helping to balance the contractionary influence of decreased demand in the Eurozone.  Let’s hope that this surge in the first part of the year does not fade as it did in 2012.

New claims for unemployment continue to decline. 

The Blight

But a 7.7% unemployment rate and a record 14 million disabled (SSA Source) show that the labor market is still sick.  The percent of working age people who are working, or the participation rate, continues to drift downward.

While the steadily improving retail sales indicate growing consumer confidence, per capita purchases are about where they were in the late 1990s, 15 years ago.

While consumers have been shedding debt, state and local governments continue to hold large levels of debt which does not include promised pension and health care benefits to retirees.

Federal Spending continues to outpace receipts, adding to the debt at a rate of more than 4% per year. At that rate the debt will double in about 18 years, reaching $30 trillion in 2030.  As a percent of the entire economy of the country, the deficit or annual shortfall between spending and revenues is still about 7%.
 

As housing prices recover and households either pay down or shed debt in foreclosure or bankruptcy, household balance sheets are looking better. What has happened in the past five years is a massive shift of household debt to the balance sheets of local, state and federal governments.

The blossoms catch our eye, inspiring hope, causing some to not notice the blight.  But the stock market, the barometer of millions of watching eyes, tells a more complete story.  While the stock market has shown renewed optimism in the past several months, its inflation adjusted value indicates a more tempered enthusiasm for the long term future of the economy and corporate profits.