There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
Back in 2012, three economists published a paper via the San Francisco Fed that looked at nearly every advanced economy business cycle from 1870 forward with the object of understanding the role of credit in the business cycle. Matthew Klein at the Financial Times alerted me of the paper.Now, what the economists found, not surprisingly, was that “financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries”. I want to discuss this both in terms of endogenous money and in terms of its implications for the present recovery and proposed recovery solutions. What follows is pretty wonky but very important as a thought piece for framing the economic environment.
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Today’s post is a potpourri of events I am seeing from around the world that impinge on macro. Europe. As expected, European consumer price inflation came in at 0.5% following the unexpected dip in German inflation. I believe the ECB will act on this, but not just via an interest rate cut but also with some other non-traditional form of […]
Topics for today: Tail risk from Ukraine is increasing, giving rise to investment opportunity Argentina is still a basket case US housing will not add appreciably to a US growth acceleration I think the big news in the markets is still Ukraine. When I last wrote about the situation in Ukraine, I warned that, “It looks like we will get […]
For years mortgage rates on “jumbo” loans have been higher than for traditional (conforming) mortgages. Since jumbo loans were larger than the upper limit permitted to be packaged and sold to Fannie and Freddie, banks would typically charge a premium for “illiquidity” on these products. But starting last year conforming mortgages became more expensive for borrowers than jumbo loans.
Fitch, the ratings agency, has reversed itself on Canada. It now believes that the housing market there is poised for only modest declines at worst. Previously, Fitch had said that Canada’s housing market was well overpriced and that a major correction was a serious risk. I believe the combination of high prices and high household debt means the risk of a major correction is still there.
The latest flow of funds data from the US Federal Reserve show that the great American household deleveraging may be over. This should add a credit accelerator to the US economy which maintains growth. Meanwhile analysts are increasingly optimistic about US and global economic fortunes. Data points and analysis follow.
At its current pace the Fed is taking about half a trillion of MBS securities out of the market. In fact the Fed is now removing more than 100% of the paper that is being issued.
The recent increase in long-term rates is causing major changes in the mortgage markets. Here are some key trends
While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index. The other is the recent slowdown in net household formation.
With wages stagnant, the proportion of income going into rent is on the rise. While homeowners have been able to reduce their monthly payments to the lowest level in decades via mortgage refinancing and cutting back on credit card usage, the financial obligations ratio for renters has been on the rise.