International Forecaster Weekly

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HOMEBUILDERS SEE A HOUSING RECESSION - Is America's Housing System Broken?

Guest Writer, August 24 2022

The American housing system is broken.

It’s bad for homebuyers and homebuilders; it’s even worse for renters. 

To put it bluntly, the U.S. desperately needs more high-quality rental housing. A lot of it.

These are far different times than those of our grandparents who came home from WWII to go to college on the GI Bill and find affordable single-family homes to raise their new families in.

Today, homeownership still works for many – but doesn't work for many others, especially those who aren’t ready to settle down in one place or who don’t have an ample nest egg to tie up all their savings in.

Builders See a Housing Recession

And builder sentiment – for single-family homes anyway – has fallen into negative territory this month, as builders and buyers alike struggle with higher costs.

The National Association of Home Builders Housing Market Index dropped 6 points to 49 this month, its 8th straight monthly decline. Anything above 50 is considered positive; 49 is not.

Notably, NAHB chief economist Robert Dietz says, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.” 

The builders index hasn’t seen negative numbers since the start of the pandemic. Before that, it hadn’t seen negative territory since June 2014.

Of the index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32.

The biggest hurdle for buyers – like many renters – right now is affordability. 

Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in early 2020, is almost double what it was at the start of this year. 

Yes, home price growth has cooled somewhat in recent weeks, while mortgage rates have come down from their 6%ish highs.

But Deitz believes, “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. 

The eternal optimist adds, however, that peaking or falling inflation and stabilizing long-term interest rates “will provide some stability for the demand-side of the market in the coming months.”

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ANOTHER DAY, ANOTHER DATA DUMP - What Do the Jobless Claims Numbers Mean?

Guest Writer, August 20 2022

Another day, another drama, another slew of confusing data flowing out of government agencies.

The U.S. economy has created over 3 million jobs so far this year.

The number of people working as of July exceeded the total seen in February 2020, just before the economy dipped into recession, at least according to the National Bureau of Economic Research.

But it looks like the hiring binge could be winding down. In fact, many companies are now planning to cut back, largely because of the Fed’s rate hiking campaign and Quantitative Tightening to rein-in high inflation.

A new PwC survey shows that 50% of companies are planning to reduce their overall headcount. 

Additionally, 46% of companies said they’re ending or reducing signing bonuses, while 44% are rescinding offers (my daughter was a recent victim).

            Myles Udland believes that reducing overall headcount doesn't mean all of the respondents to PwC's survey are planning layoffs but indicates plans similar to what’s been going in tech.

As the report says: "Respondents are also taking proactive steps to streamline the workforce and establish the appropriate mix of worker skills for the future.”

That should come as no surprise. After a fury of hiring and a tight labor market over the past two years, executives see the distinction between having people and having people with the right skills."

Or, as Steven Covey once put it, having the right people in the right seats on the bus.

Since the labor market bottomed in April 2020, more than 22 million jobs have been added – or in many cases, added back – to the economy.

Fed Chair Jerome Powell told reporters last month, the U.S. labor market is "very hot." And those comments came before the government’s July jobs report showed 528,000 jobs were created last month.

This robust rebound, however, has been far from evenly spread across industries.

The nonpartisan Committee for a Responsible Federal Budget reports that overall leisure & hospitality employment is still down over 1 million jobs from February 2020.

At the same time, industries like "professional & business services" – which covers a host of white collar, Zoom-based, remote jobs – are up almost a million jobs (986,000) from pre-pandemic levels.

Udland says this uneven industry-level recovery “is why it sometimes feels like ‘everyone’ has gotten a new job in the last year while no restaurant…is fully staffed these days.”

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Guest Writer, August 17 2022

In late June, I wrote in how crack spreads would “see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.”

Crack spreads measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.

The spreads – aka oil refiners’ profits — have soared this year as gasoline demand outstrips supply.

While surging profit margins for the makers of gasoline have opened the industry up to charges of price gouging, industry officials claim they’re producing as much gas as they can these days.

Industry capacity utilization was running at 94% as the summer began – the highest since 2018 when it hit 97%.

At the same time, a Department of Energy report also showed that overall refining capacity has fallen in the last two years. In fact, it’s now back down to where it was in 2014, meaning that supply would be stifled even if refineries were to run at 100%.

So, I wrote, with little chance of bringing new sources of gasoline online anytime soon, “the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.”

That, I predicted, “will become a growing source of agita for investors in oil companies – and other industries.”  Seems I was a tad overconfident.

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Things to Explore

Bob Rinear, August 13 2022

The Commercial/Selling a Put

            I got an email the other day from a gent who was watching TV, and a commercial came on. In that "financial" based commercial, there was a conversation between a client and what appears to be either his broker, or advisor. In the flow of conversation, the advisor says to the client, "well we might consider selling a put..."  to which the client says something like "that's an interesting idea."

            So I got this email, and Joe R. asks, "Bob, what's up with selling a put and why is that an interesting idea?" I thought maybe others might be interested in the answer, so I told him I'd address it to the subscription base.

            If you don't know how options work, then this is going to sound like goblety -gook. But even if you do know about buying calls and puts, "selling" a put is in a different category.  You'll need to pay attention because the differences are many. 

The following is from an options tutorial I wrote years ago, and sometimes parts of it come in pretty handy.  This is one of those times, because later in the tutorial you're going to see why in that commercial the client thought that selling a put was an "interesting" idea. 

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Guest Writer, August 10 2022

Americans expect inflation to drop precipitously over the next three years, according to the New York Fed. 

And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”

The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.

History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.

In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”

But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.

In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).

The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%

Irwin reports that the drop was most evident among survey respondents making less than $50,000.

He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.

Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting. 

Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”

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Guest Writer, August 6 2022

Courtenay Brown and Neil Irwin have been spot-on with their analysis of the economy recently. 

Yesterday, they wrote that the “strong labor market continues to be the economy's bright spot.” 

They say it could stay robust even as the Fed sends the economy into a slowdown if, that is, “businesses hoard workers to avoid repeating past mistakes.”

Employers, particularly in industries that have struggled with labor shortages, may be more reluctant to lay people off, even as rising interest rates and other factors slow consumer and business demand.

Brown and Irwin believe if employers maintain their payrolls, it would make the coming “economic slowdown milder and less painful for workers than recent recessions.”

They point to recent company earnings calls, where some employers have reported hesitancy to reduce their headcounts, even as growth deteriorates.

Government quarterly reports show that GDP has shrunk a cumulative 2.5% in the first half of 2022.

Chris Gorman, CEO of bank holding firm KeyCorp, said, "It's been challenging, frankly, to be out in the hiring market in this ride-up in the last couple of years." 

That's why he says his company will staff up more in some areas "in sort of a flat or down" environment than they have in the past.

In June, only 1.3 million workers were laid off, fired or otherwise released from their jobs, according to the Labor Department. 

That’s down 28% from the average of 1.8 million in 2019 (i.e., before the pandemic) – suggesting that companies are indeed more reluctant now than they were then. 

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Guest Writer, August 3 2022

Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.

            On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.

On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.

The fight is being debated in various academic papers, but the real stakes for workers and their families are high. 

Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”

They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate. 

Other things being equal, as job vacancies rise, unemployment falls and vice versa.

As of May, job openings trended lower but remained near their highest levels ever at 11.3 million. 

Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).

The result is an unprecedented 1.9 job openings for each unemployed worker.

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More Random Thoughts

Bob Rinear, July 30 2022

I want to take a break in the self/home defense series and chat a bit about recent economic developments, including gold.

So the Feds tossed another 75 basis point hike on us this week. That was totally expected. They have to look like they’re doing something to combat the worst inflation in 40 years.

But in this world, in the year 2022, nothing is as it seems. Nothing is as it should be. See, on one hand they’re hiking rates into a slow economy, which is a recipe for disaster. But on the other hand, the one they hide behind their back, they’re buying up about 320 million dollars worth of assets per day.

Why is that? Remember a couple weeks back, where the ECB put out a news blurb that literally caught me so off guard, I had to rethink a lot of things? That blurb said that the ECB would use “unlimited” resources to keep the debt market intact.

The European Central Bank will unveil an unlimited bond-buying tool next week to help markets better adjust to steeper and faster interest-rate increases than previously thought, economists surveyed by Bloomberg say.

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KEEP ON TRUCKIN’ - More Truckers Cruising, More Needed

Guest Writer, July 27 2022

I’ve always been fascinated by trucks – big trucks; the ones with 18 wheels – and the men and women who drive them.

My first full-time job offer out of college way back in the day was from the American Trucking Association. That I declined that position to take one with another DC nonprofit didn’t negate my lifelong fascination. 

One of my fondest memories of that era is my casual friendship with a guy who worked for National Geographic during the week and drove 500-1,000 miles roundtrip on weekends as an independent truck driver.

When he retired from National Geo, he drove a lot more miles every week in his big truck to support his true love (well, actually, true loves – if you count his lovely wife!).

When I read over a year ago about the nation’s big shortage of truck drivers, I worried about people like my old friend, not to mention its impact on our economy, with already messed-up supply chains.

More Truckers Than Ever

But today, more than 18 months later, Axios’ Emily Peck asks, what trucker shortage? 

She writes that employers have managed to find and hire over 115,000 new truckers since the depths of the pandemic in 2020.

At the height of the supply chain crisis, which is still ongoing, transportation companies pointed to a shortage of truckers as a contributing factor. 

Truckers and their advocates were quick to point out that low pay, poor working conditions and high turnover were driving the growing problem.

Now, Peck says the shortage is getting better, even possibly over – pointing to a report from transportation market research group ACT, which notes, "The driver supply flipped from shortage to surplus in early 2022." 

The surge in hiring, according to Peck, comes as big wage increases and demand for trucks to deliver all the goods we've been buying are bringing loads of new drivers to the profession. 

            Plus, she adds, some of the health constraints of the pandemic have begun to fade away.

Now that federal stimulus checks are a thing of the past and prices are surging, driving a truck – in an industry with wage growth that’s outpacing inflation – looks unusually appealing.

Andrzej Tomczyk of too big to fail Goldman Sachs said employers "have been trying to hire like crazy ever since the pandemic-induced demand surge led to relative capacity constraints in the industry. So, it’s likely a reflection of some catch-up coming online."

Over 20,000 more long-haul truckers got jobs in May, the largest monthly addition of new truckers since 1997 – when the Bureau of Labor Statistics started tracking.

In fact, long-haul trucking employment is now 2% above pre-pandemic levels. And average weekly earnings were about 11% higher in May, compared to a year ago, for drivers in freight trucking.

According to BLS, the average weekly earnings of truck drivers have increased about 33% from January 2018 to May 2022, to $1,215 – which equates to $63,000 a year. 

Many veteran and independent long-haul drivers earn a lot more. Recently, more drivers have bought their own truck and, according to Peck, are taking advantage of surging "spot prices" (live market rates) for hauling.

"A lot of people who wouldn't normally be a truck driver" became truck drivers, observed Kenny Vieth, president of ACT.

As the chart above shows, there are now a new millennium high of 1.1 million general freight truck drivers – up 28% from about 860,000 at the depths of the Great Recession.

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Guest Writer, July 20 2022

In one of his lesser-known songs, “Easy Money,” legendary singer-songwriter Billy Joel writes:

I want the easy, easy money

I could get lucky, things could go right

I want the easy, easy money

Maybe just this time, maybe tonight.


Things aren’t so easy these days for the too big to fail banks whose financial shenanigans are coming home to roost. 

Profits at mega Wall Street banks took a nosedive in the 2nd quarter, as "easy money" policies that made the pandemic era a boom time in lower Manhattan come to a close.

The latest earnings reports show that Goldman Sachs and Bank of America earned smaller profits than a year earlier. Ditto for Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley.

Free money on Wall Street — a side effect of the “emergency” monetary policies the Fed implemented to keep the pandemic from imploding the economy — has been winding down over the last few months.

The Fed started cutting interest rates in March 2020 – slashing them to virtually 0% and began printing trillions of dollars and pumping them into financial markets, if not the economy as a whole.

And as Matt Phillips points out, that turbocharged Wall Street – driving public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating hyperactive trading desks.

Bank stocks themselves surged, too. A year after the stock market hit bottom in March 2020, Morgan Stanley was up 200%, Goldman Sachs was up 150%, while Bank of America and Citigroup had doubled. 

The S&P 500 grew by a measly 75% over that same time.

Fast forward to 2022: interest rates have begun to take off, rapidly changing the conditions in financial markets and slowing down business in the New Normal.

High rates have been crushing stock prices as of late and pushing the S&P 500 into bear territory, and now, companies are getting antsy about what new business to write in a down economy.

The business of managing new corporate bond sales is also sagging as interest rates rise – with companies not wanting to borrow at the new, outrageously high rates (2-3%!).

And, as Phillips notes, higher borrowing costs – which the Fed is using to try to ease inflation – also increase the risk of recession and the losses on loans that normally occur during downturns. 

So, banks are socking away billions in reserves just in case things get ugly, which hurts their earnings. 

But it's not all bad on Wall Street. In fact, volatility can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman and Citi this last quarter.

Higher interest rates can also boost the money that banks make by charging interest – Bank of America, for one, did just that.

But overall, higher interest rates in the months ahead mean tighter margins for big banks – with stagnant dividend payments, less share buybacks and more circumspect credit for the rest of us.

Could It Get Worse?

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Guest Writer, July 16 2022

Before anyone had time to fully explain June's inflation numbers, the growls had already begun on trading desks and research shops: 

Maybe in two weeks the Fed will raise interest rates by a full percentage point — the most at a single meeting in its modern history. 

This increasingly likely scenario shows the jam the Fed has gotten itself into, with Fed officials seeking to express to the country a whatever-it-takes attitude. Neil Irwin and Courtenay Brown say that’s put them in a corner.

            It’s a precarious situation where high inflation reports demand a mounting series of interest rate hikes and other policy moves that end with reduced consumer and business spending and a cratering economy.

Just last month, a high May inflation reading drove Fed leaders to make a last-minute shift to raise interest rates by 75 basis points, not the 50-point increase they had been signaling.

Well, here we go again. Wednesday's BLS report showed a 9.1% rise in the Consumer Price Index over the last year — and perhaps more significantly, the uptick of monthly core inflation to 0.7% in June.

And yesterday’s Producer Price Index, which essentially reflects wholesale prices charged to retailers, was even higher – at 11.3%.

It was a "major league disappointment," as Fed governor Christopher Waller said in a speech afterwards. The stock markets agreed.

The reports set off alarm bells throughout the financial world that recent history would repeat itself and, by day's end, the CME futures markets would almost fully price in a one-percentage-point rate hike at the end of the month.

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CONSUMERS SEE INFLATION COMING DOWN - But Still 80% Higher Than Fed’s Goal

Guest Writer, July 13 2022

The Federal Reserve’s dual mandate is to promote stable prices and maximize employment. Today, we take a look at how current events are affecting those policy mandates.

Early Pandemic Layoffs Driving Today’s Labor Shortages

One only has to recall the infancy of the pandemic to see why employers in a broad range of industries are struggling with historic labor shortages.

Decisions made in 2020 to cut staff appear to be a root cause of many 2022 frustrations, according to Courtenay Brown and Neil Irwin of Axios.

The industries hardest hit at the pandemic's onset — restaurants, hotels and airlines — are now those seeing a boom in demand. 

Even with higher pay, though, they're struggling to replace the workers they laid off back then – some of whom have moved to other industries where the pay is comparable or higher and working conditions are better.

The worker shortage has pushed businesses to raise wages rapidly, which has, in turn, kept inflation elevated. 

On the other hand, this dynamic has been more subdued in Europe.

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JOB GROWTH UP - What Does It Mean?

Guest Writer, July 9 2022

Wow, talk about exceeding expectations

Job growth was up much higher than pundits expected in June, as reported today by the government.

According to the Bureau of Labor Statistics, nonfarm payrolls increased by 372,000 over the month, way stronger than economists’ consensus estimate of 250,000.

            The BLS’ U-6 unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons dropped to 6.7% from 7.1% (the underreported U-3 headline rate remained unchanged at 3.6%).

Civilian labor force participation was essentially flat, falling slightly to 62.2% from 62.3% but still remains more than a full percentage point below the level seen just before the pandemic started in 2020.

Total civilian employment – at 158.1 million – actually fell somewhat in June and was still close to 800,000 below its February 2020 level.

            Average hourly earnings increased 0.3% for the month and were up 5.1% from a year ago, indicating that wage pressures remain strong as brisk inflation sails along.

Among the unemployed, both the number of permanent job losers (1.3 million) and the number of persons on temporary layoff (827,000) changed little over the month. 

The number of long-term unemployed – i.e., those jobless for 27 weeks or more – was essentially unchanged at 1.3 million. This measure is 215,000 higher than in February 2020. 

The long-term unemployed accounted for 22.6% of all unemployed persons in June.

Interestingly, 7.1% of employed Americans teleworked (worked mainly from home) because of the pandemic, down from 7.4%. 

            Another 2.1 million people reported that they’d been unable to work because their employer closed or they were laid off thanks to the pandemic – up from 1.8 million in May.

By sector, education and health services led the job added, with 96,000 hires, while professional and business services added 74,000 positions.

What do these numbers mean? 

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July 4

Bob Rinear, July 2 2022

It is indeed the July 4th weekend. While idiots riot in the streets and say that the United States should be abolished, rarely do any of these mind numb brats have any idea how good they have it, or why they got it.  Nor do they understand how close they are to losing it.

Let’s take a break from the weapons/self defense series, and give this date the respect it so much deserves.

Like most things in History, the fourth of July  isn't exactly as you think. Let's look:

            During the American Revolution, the legal separation of the Thirteen Colonies from Great Britain in 1776 actually occurred on July 2, when the Second Continental Congress voted to approve a resolution of independence that had been proposed in June by Richard Henry Lee of Virginia declaring the United States independent from Great Britain's rule. After voting for independence, Congress turned its attention to the Declaration of Independence, a statement explaining this decision, which had been prepared by a Committee of Five, with Thomas Jefferson as its principal author. Congress debated and revised the wording of the Declaration, finally approving it two days later on July 4.

A day earlier, John Adams had written to his wife Abigail:

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OIL REFINERS’ PROFITS HAVE SOARED - Is It Corporate Greed or Supply and Demand?

Guest Writer, June 25 2022

Crack spreads — vernacular for oil refiners’ profits — have soared this year as gasoline demand outstrips supply.

They measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.

Matt Phillips of Axios believes crack spreads will see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.

Already, stocks of the major oil refiners got hammered on Wednesday, heading into yesterday’s meeting between Energy Secretary Jennifer Granholm and top industry executives.

Marathon Oil fell 7%, Phillips 66 and Conoco Phillips both dropped 6%, while Chevron and Exxon both fell about 4%.

President Biden publicly is urging an increase in U.S. refinery production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."

But earlier this year, as crack spreads soared, so did the share prices of major American refining companies, which are up a whopping 38% since January – even as the S&P 500 index has entered bear territory.

While surging profit margins for the makers of gasoline open the industry up to charges of price gouging, industry officials claim that they’re producing as much gas as they can right now.

Industry capacity utilization is running at 94% these days – the highest since 2018 when it hit 97%.

But a recent government report also showed that overall refining capacity has fallen in the last two years. 

In fact, it’s now back down to where it was in 2014, meaning that supply will remain hurt even if refineries were to run at 100%.

So, with little chance of bringing new sources of gasoline – domestic or imported – online anytime soon, the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.

That, I predict, will become a growing source of agita for investors in oil companies – and other industries. 

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