Make Hay While the Sun Doesn't Shine
Today new Fed Chairman Janet Yellen jumped on the bandwagon in blaming the recent growth slowdown on the weather.
Here's what I have to say about the news and the weather.
First, although it's becoming quite passé to point this out, the weather should account for a slowdown in economic activity - but, since economists were aware of the weather (presumably), it is less clear that it should account for a surprise in the amount of slowdown we are seeing. The chart below (source: Bloomberg) shows the Citibank economic surprise index, which measures how much recent data have exceeded (positive) or fallen short (negative) of expectations. It is not a measure of growth, per se, but merely of the direction in which economists are missing. I have plotted both the US index and the Eurozone index.
Obviously, economists were far too pessimistic about the numbers in December and January (reflecting data from October to December, and data kept exceeding their estimates. But now they are over-exuberant. So it isn't that the numbers are falling short; it's that they're falling short of where economists (who can presumably recognize snow) thought they would be incorporating the known weather drags. That could simply mean the weather had a worse impact on real people than the bow-tied set thought it would. Or it could mean data is weaker than it ought to be.
Second point: just because the weather was bad should not be taken as carte blanche for the economy to collapse. If the economy was really as strong as equity investors seem to think, should weather be able to derail it so easily? Yes, weather makes it harder to detect the natural rhythm of what is going on, but it wasn't as if that was easy to begin with. The danger is, as I suggested a week and a half ago, when all news can only be neutral or good. That's a bad sign for once the weather normalizes again and it gets impossible to shrug off bad news as easily.
Third point: was the weather as bad in Europe? Because, as you can see from the chart above, economists have also been missing on the optimistic side for European figures. To be sure, they've been missing by less, and the numbers surprised less on the positive side over the last couple of months, but I don't know that the Polar Vortex ought to be affecting Italy as seriously as it is affecting Chicago.
All of which is simply to say that the weather isn't going to be bad forever, so ... make hay while the sun doesn't shine, I guess. Stocks are flat on the year, the hard way (but commodities are +6.5%, measured by the DJ-UBS index; according to our valuation estimates, that should be the normal case over the next few years rather than the rarity it has been over the last few).
It is interesting, too, that as bad as the weather effect has been on the construction industry and sales it hasn't really impacted the price dynamics at all. The chart below (source: Bloomberg) shows Existing Home Sales in white, and the year/year change in median sales prices of existing single-family homes. Sales are 14% off their highs (seasonally-adjusted, which you should take with a grain of salt due to the unseasonal weather, but notice that the decline started in August when the snow was appreciably lighter), yet prices are still rising at nearly 11% year/year.
Now, a housing bull will say that these are the opposite faces of the same coin. They would say, "because there is so little inventory available - according to the NAR, only 1.9mm homes are for sale, which is higher than last winter but otherwise the lowest since 2002 - prices are rising and fewer are being sold because of the shortage of supply." This is certainly possible, although I wonder at where all of the 'shadow supply' and bank REO property got off to so quickly, especially since the pace of existing home sales (and new home sales) remain at such low fractions of the pace prior to 2007 (existing home sales is currently 64% of the peak rate in 2005; new home sales are at 34% of the 2005 peak). How do you get rid of inventory without selling it?
The housing market continues to be a conundrum, but without a doubt prices are rising. And, also without a doubt, rising home prices are beginning to push rents higher. More economists are raising their forecasts for core inflation looking forward over the next year. Of course, readers of this column know that this is old news here. Speaking of which, Enduring Investments' Quarterly Inflation Outlook for Q1 has been published. Institutional investors and others interested in our services can register for this private report on our website by filling out the contact form and requesting access to the blog.
Finally, I want to make one observation about the complete impotence of the Republicans to respond to the Democrats' push for a higher minimum wage. It is terribly distressing to see such bad economics from one party (in this case, the Democrats) and such utter lack of common sense responses to bad economics from the other party (in this case, the Republicans). Here is the only question that needs to be answered: if raising the minimum wage has only salutatory effects on the economy and on the working class, then why not raise it to $1000/hour? Why not $10,000 per hour? Surely, if raising the minimum wage is good, then raising it more can't be bad. Republicans should be amending the bill to make the minimum wage $10,000/hour.
The obvious answer is that if the minimum wage was $10,000/hour, no one would hire anybody - and we all know that, and even Democrats know that, and we all know why: because there is almost no one in the country who can produce enough goods or services to be worth $10,000/hour. If you are hiring people, you have to decide whether you will get enough out of them to afford their labor and still stay in business. The answer is obvious at $10,000. But it's the same question at $10: can this group of workers produce enough so that I can afford to pay them all $10? If not, they will not be earning $10/hour but $0/hour (or at least some of them will be). We know exactly what would happen with a $10,000/hour minimum wage, and it's easy to demonstrate it. But the Republicans are absolutely inarticulate on this point, and on most points, and that is why they keep losing arguments where they have the stronger position.
Housekeeping Note: earlier this week I published an article on the Mt. Gox/bitcoin fiasco. If you didn't see the note (it didn't get out on all of the syndication channels), you can find it here.
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