Central Bankers Could Have Cleaned Things Out 10 Years Ago
New home sales, those of newly constructed single family structures, surged in September to the highest level since October 2007. Given an almost exact decade’s worth of time, the result is being heralded throughout the world as another data point suggesting how everything is finally back on track. The mainstream, which are predisposed to see anything moving up as confirmation of that view, thus miss what is the bigger, more accurate interpretation.
The sales number instead describes everything that is wrong with the US and global economy. It was not a good result by any measure, even if the month of September saw increased activity outside of the hurricane-ravaged South.
What the Census Bureau estimates is that 667,000 new homes were sold, two-thirds of which haven’t yet been built. It sounds like a possibly substantial economic pickup, particularly in comparison to the 561,000 (revised) that were figured to have been sold in August. It’s that nearly 20% monthly gain, the largest in a quarter-century, that has everyone so excited.
Those are numbers presented as seasonally-adjusted annual rates, however. There weren’t actually 667,000 homes sold in September, rather there were 52,000. The former number is merely a presentation tool so that data like new home sales can be presented in a constant stream, where one month can be compared to the next (and the next).
The unadjusted sales estimate, that 52,000, was up almost 20%, too, but year-over-year rather than month on month. It sounds impressive but it’s actually more typical of the last few years, suggesting there wasn’t anything all that special about September’s builder activity. There really isn’t any good way, especially in a very noisy data series like home sales, to compare one month to the next.
There is much less for statistics in comparing September 2017 new home sales to those in September 2016, as I did above, or to those in September 1995. In fact, there were fewer new homes sold last month than in the same month twenty-two years ago; 52,000 vs. 54,000.
That’s the part to really focus on, and the one no one ever does in tying 20% growth to something it truly isn’t. The numbers that relate to the comparison, or should if there weren’t something else going on, are staggering. Between September 1995 and September 2017, the Civilian Non-institutional Population, the BLS’s estimate of potential laborers in the US, expanded by 56.6 million people.
How is it possible, then, that fewer new homes were sold in a “very good” month just recently than almost a generation ago?
By population alone there should have been something like 70,000 new homes sold in September (+56.6mm population represents a 28% gain, so 54,000 new homes sold in 1995 should lead to 69,300 new homes sold in 2017 for a constant demographic). The easy answer is the housing bust, meaning that twelve years ago and before there was a rush of new homes built that really should not have been; for some time, the US housing stock was overdone.
That explanation, however, doesn’t follow in the demographics, either. It has been, again, twelve years since that peak, and for almost all of those twelve years since then housing construction has remained at a rate well-below historical trends. By all counts, after so much time, the oversupply of those housing units has been absorbed and then some.
Adjusted for demographics, 667,000 SAAR in September was 0.261% of the Civilian Non-institutional Population. That’s less than half the rate of new home sales during the peak housing bubble period 2004-06. It’s also substantially less than the pace from the earlier 1990’s before the housing bubble got started (0.34%), and is instead equal to 1991 during and after the recession that year tied to the S&L crisis that (briefly) devastated the mortgage and housing markets.
So in the most recent month of new home sales, the pace of selling and thus future construction is equal in population terms to one of the worst periods for real estate in American history. And that is for a “good month”, meaning that housing going back to 2007 has grown but at a rate that really sets a new low for what will forever be counted as the actual worst period for real estate in American history.
The overbuilding during the bubble just cannot account for this, not the length of time involved and the natural population expansion that on its own would have overcome that oversupply far quicker.
In September 1995, 62.9% of Americans that were counted by the BLS as within the Civilian Non-institutional Population were figured also to have been employed in one capacity or another. Twenty-two years later, in September 2017 just 60.4% had jobs. A 2.5% difference doesn’t sound like much but it really is, and in many ways it is understated by a few factors.
Fifty-one percent of potential laborers had acquired full-time employment back then, while only 49% have more recently – and that’s up from a low of 46% in 2010. Not only that, the types of jobs available within these employment categories, including those classified as full-time, are vastly different (at the margins of job creation).
There were 17.3 million manufacturing jobs in September 1995 compared to 12.4 million last month. On the flipside, there were 1.8 million temporary help workers twenty-two years ago, and 3.1 million now. And there were 7.5 million Americans working in the food service industry back then, but by September 2017 there were nearly 12 million jobs in that space. You get the point.
Fewer Americans, proportionally, are working now than two decades ago, and those who are working aren’t (at the margins) working in same capacities. Building fewer new homes today is the least of our problems, a symptom rather than something to worry about in isolation (the last ten years, remember, have featured some of the most aggressive and imaginative if ultimately ineffective housing “stimulus” ever invented).
To the rising socialist left, this is a matter of inequality. To the rising populist right, it’s a black mark against free trade. They are, conditionally, both correct.
You can see it best in the breakdowns for real estate sales, both of new homes as well as existing houses. They are all skewed toward the upper ends, and in most months by more than a little. Those Americans who are doing well are doing really well and continue to act that way – and there is nothing at all wrong with that.
It’s everyone else who is the problem, or, more accurately, for whom the economy is every problem. Even in the healthiest, most robust economic advance there will always be some measure of inequality. Some proportion will have to fill out the left hand part of the bell curve, in income or wealth. What’s different is the sudden addition of kurtosis to the economic distribution, the fattening (to put it mildly) of the left-hand tail that represents all the people counted in the statistics cited above – far, far too many to simply ignore as the few broken eggs in the globalization omelet.
That is why so many today focus on immigration and other elements of globalization like free trade. For one, Ross Perot has been proven exactly right; the giant sucking sound he predicted for American manufacturing jobs did materialize, only several years later than what would have truly vindicated his widely mocked stance. It happened in the 2000’s rather than the 1990’s, coincident to the housing spree.
The focus of angst and anger on things like NAFTA is therefore understandable if ultimately incorrect. For a really hard to define and condense economic issue, people can readily visualize the loss of the American manufacturing base (that started long before NAFTA). Writing this now from my office in downtown Buffalo, I can see right now out my window south into Lackawanna the vast crumbling artifices still left over from an America that for many doesn’t exist anymore. The term “rust belt” is an unusually accurate one.
We know what is gone because we can see it, and feel it. There was supposed to be benefits to this massive cost, but where are they?
Many economists argue that this is nothing more than the natural progression of economic transformation. Low value manufacturing work was shipped overseas to be done more cheaply by unskilled labor. In its place, high value information era work was supposed to be plentiful as the good end of free trade. As Ricardo said long ago, everyone wins. No one could rationally argue against this proposition, especially since our economy had been through it (agrarian to industrial) once before and been far, far better off for it.
But that’s not what happened; at all. The labor statistics bear that out – there are fewer jobs overall proportionally, and what jobs were created tend to be different low value jobs that don’t pay anywhere near the same as those low value, higher wage positions that over the past few decades have been offshored. It’s this part that economists struggle with.
The answers to everything, all the imbalances from housing to the economic transformation globally, now to the lack of recovery after those prior imbalances were replaced by others, all of it traces back to one thing – Deutsche Bank.
What was once the biggest bank in the world and one that all the others envied is now the world’s biggest headache. It is most visibly for its management and shareholders. The firm which could do no wrong for decades can’t now get anything to go right. They are on the fourth or fifth restructuring plan, I’ve lost count, and this latest one isn’t producing in the same way all the prior ones failed, too.
Earlier in the quarter, DB’s CEO John Cryan previewed another rough three-month stretch for his firm. Results finally released this week confirmed that Cryan was actually being optimistic. Trading revenue was down 20% year-over-year, and in “bond trading”, or FIC (Fixed Income + Currencies) as Deutsche Bank classifies it, revenue comps were an alarming -36%.
It’s that last one that really matters, FIC or FICC as it is labeled elsewhere among the global banks. And it makes the global economic problem that much harder to crack. As I wrote a few weeks ago:
“The issue is, as Fitch highlights, the ‘bond-trading business.’ The term itself only clouds the global economic issue further; workers all over the world are being screwed because banks like DB can’t make enough money in bonds? Forget that. It sounds so ridiculous that even sympathetic politicians aren’t going be able to make that connection.”
But that’s really the key that unlocks everything. What made the housing bubble in the US was the same thing that made Ross Perot’s giant sucking sound possible. The timing of it isn’t a mystery. It takes more than cheap foreign workers for manufacturing jobs to move elsewhere. You need cheap, readily available “dollars” for a global supply system to function.
The eurodollar in its mature stage provided exactly those, and a seemingly endless supply of them. Only they didn’t often seem like dollars at all. They were, mostly, various forms of strictly bank liabilities that didn’t count anywhere else than in the footnotes. These were the kinds of transactions that institutions like DB made piles of profits on, compiling often breathtaking revenue growth in FICC (especially via proprietary trading).
That monetary growth had two primary outlets. The first was as “hot money” or overseas “capital inflows.” The resources to build China, Brazil, and all the rest of the BRIC’s and EM’s were provided by shadow banks doing a whole lot of “bond trading.”
The second part of that, especially for those firms in Europe, was as a credit bubble aimed right at America. Manufacturing jobs were shipped on the eurodollar to China and replaced not in the “new economy” promise of tech and IT but in the eurodollar economy of credit cards, mortgages, and houses-as-ATM’s. Earned incomes, at the margins, were replaced with an enormous credit supplement that allowed that offshoring to continue far longer than it should have – along with the millions of houses ultimately overbuilt at the same time for really the same economic reasons.
Take away the credit supplement, as the eurodollar panic did starting in 2007, and what’s left is a shrunken economic base or potential. It’s not free trade. That outcome isn’t just ours alone to bear; it is being shared all over the world including those places where the manufacturing base ultimately ended up. After all, if your customers buy all the stuff you are now building for them on credit, they aren’t going to be very good customers when the credit disappears.
And it has disappeared, especially in non-linear terms (clear shift in growth paradigm). The reason it is gone and remains that way is because Deutsche Bank still ten years later can’t make any money in “bond trading.” (Note: I am using DB here because it is in my view the best representation of what was, and now is, but it’s not just DB, of course, as this affliction is shared by each eurodollar bank all over the world in London, New York, Tokyo, and all the rest of the money centers that before August 2007 saw only reward for very little perceived risk.) There is a contradiction in there that is the root cause of all these afflictions.
One of the primary impediments has been liquidity preferences. This is where the QE’s in whatever local jurisdiction are so inappropriate as to be irrelevant. They don’t provide what’s actually missing, which is balance sheet capacity in highly non-traditional forms. The stuff like credit default swaps which were instrumental in the later eurodollar economic transformation don’t really exist anymore as a liquidity and balance sheet construction technique. They were never replaced.
That’s ultimately a good thing, as is so much else that has happened with respect to eurodollar banking, but only in isolation. We shouldn’t mourn the loss of CDS because of the way in which they were ultimately used, but also to the unthinkable degree to which they were. But the system was built for them, and for things like them, and so without replacing that system nothing can truly work like it did for their absence.
That’s really the problem, not that Deutsche Bank can’t make money in bonds, rather that the system as it is right now still requires that it does. It was bond trading in all its unique and wondrous forms that supplied the global eurodollar liquidity for both the giant sucking sound as well as the mortgage credit to pay for it (on the US side). Without firms committed to FICC, there is no liquidity, leaving liquidity preferences to rule in credit decisions, and thus a global economy with no more giant sucking sound for EM’s to grow nor the credit to pay for anything that they would then make (apart from hugely inefficient government and corporate borrowing via the bond market).
You can see why there is a growing backlash against NAFTA and globalization from both sides (though it is more a right-leaning issue directly). It is where the visible rubber met the visible road, but it is not what really caused the world’s great, lingering economic ailments. In truly free trade, there are only winners; in the eurodollar version of it, there have been only losers – on all sides (I looked more closely at the state of China’s economy and political situation just last week).
Eurodollar free trade was more than a misnomer; free trade isn’t actually free, but in the explosive monetary era it seemed that way, too good to be true (because it was).
Free trade is an unequivocal good, but it requires other conditions apart from just two parties signing an agreement. The very first priority or prerequisite is a stable monetary system that can monitor (via prices) imbalances, and even deal with them before they get so far out of hand (imposing those costs where appropriate). Because of the way “bond trading” occurs, deep within the shadows, governed by the utterly complex mathematics of truly exotic derivatives and PV calculations, stable can’t ever really factor into it.
The eurodollar system was, instead, the perfect, and I mean perfect, vehicle to carry out these massive imbalances. Now we are stuck with their effects without any other way to transact global monetary and therefore economic behavior. We build fewer homes today than two decades ago because fewer Americans proportionally have been working, and working in jobs that pay enough to maintain lifestyles. The Chinese are going to build fewer ghost cities, and run the risk of the ones they have already built remaining that way, because global trade is restricted on the same basis.
Eurodollar globalization has been an equal opportunity infection. It was a truly modern malady in that like some kinds of computer viruses it is celebrated and applauded at first when you appear to get something for nothing, all the while it’s doing other things you don’t know about which will cause you great pain in the end.
The “dollar” is in many ways exactly that, a computer virus that infected the global monetary network. Nobody ever bothered to clean it out and reboot the system, however, even though every global monetary official was handed the perfect opportunity to do just that about ten years ago.
Only one of those officials, the People’s Bank of China Governor Zhou Xiaochuan, ever bothered to recognize this virus for what it was – credit-based currency. The rest are still to this day criminally unaware even though every single monetary scheme invented since then has produced the same result – nothing. At the heart of a credit-based currency lies bank balance sheet capacity, and the basis for that is still “bond trading.” Either Deutsche Bank starts making a whole lot more in fixed income or we will still be building far fewer houses for far fewer “living wage” workers.
The other option is to wait for politicians and central bankers to make that connection. It’s been a long wait already, and will likely be a much longer one still.
