The Economy Is Starting To Implode

Regardless of the Fed Funds rate policy decision by the FOMC today, the economy is spinning down the drain. Lower rates won’t help stimulate much economic activity. Maybe it will arouse a little more financial engineering activity on Wall Street and it might give a temporary boost to mortgage refinancings. But the economic “recovery” of the last 8 years has been an illusion based on massive money printing and credit creation. And credit creation is de facto money printing until the point at which the debt needs to be repaid. Unfortunately, the system is at the point at debt saturation. That’s why the economy is contracting despite the Fed’s best efforts to create what it incorrectly references as “inflation.”

The Chicago PMI released today collapsed to 44.4, the second lowest reading since 2009 and the sharpest monthly decline since the great financial crisis. The index of business conditions in the Chicago area has dropped 5 out of 7 months in 2019. New orders, employment, production and order backlogs all contracted.

The Chicago Fed National Activity index for June remained in contraction at the -0.02 level, up slightly from the reading in May of -0.03. The 3-month average is -0.26. This was the 7th straight monthly decline for the index – the longest streak since 2009. This index is a weighting of 85 indicators of national economic activity. It thus measures a very wide range of economic activities.

The Richmond Fed manufacturing survey index fell off a cliff per last week’s report. The index plunged from 2 in June to -12. The June level was revised down from 3. Wall Street was looking for an index reading of 5. It was the biggest drop in two years and the lowest reading on the index since January 2013. Keep in mind the Fed was still printing money furiously in 2013. The headline index number is a composite of new orders, shipments and employment measures. The biggest contributor to the drop was the new orders component, as order backlogs fell to -26, the lowest reading since April 2009. The survey’s “business conditions” component dropped from 7 to -18, the largest one-month drop in the history of the survey.

Existing home sales for June declined 1.7% from May and 2.2% from June 2018 on a SAAR (seasonally adjusted annualized rate) basis. This is despite the fact that June is one of the best months of the year historically for home sales. Single family home sales dropped 1.5% and condo sales fell 3.3%.

On a not seasonally adjusted basis, existing home sales were down 2.8% from May and down 7.5% from June 2018. The unadjusted monthly number is perhaps the most relevant metric because it removes both seasonality and the “statistical adjustments” imposed on the data by the National Association of Realtors’ number crunchers.

The was the 16th month in a row of year-over-year declines. You can see the trend developing. June 2018 was down 5% from June 2017 (not seasonally adjusted monthly metric) and June 2019 was down 7.5% from June 2018. The drop in home sales is made more remarkable by the fact that mortgage rates are only 40 basis points above the all-time low for a 30-yr fixed rate conforming mortgage. However, this slight increase in interest expense would have been offset by the drop in PMI insurance charged by the Government for sub-20% down payment mortgages.

The point here is that pool of potential home buyers who can afford the monthly cost of home ownership is evaporating despite desperate attempts by the Fed and the Government to make the cost of financing a home as cheap as possible. 

New home sales for June were reported to be up 6.9% – 646k SAAR from 604k SAAR – from May. However, it was well below the print for which Wall St was looking (660k SAAR). There’s a couple problems with the report, however, aside from the fact that John Williams ( referenced the number as “worthless headline detail [from] this most-volatile and unstable government housing-statistic.” May’s original number of 626k was revised lower to 604k. Furthermore, the number reported is completely dislocated from mortgage application data which suggests that new home sales were lower in June than May.

The new home sale metric is based on contract signings (vs closings for existing home sales). Keep in mind that 90% of all new home buyers use a mortgage for their purchase.
Mortgage applications released Wednesday showed a 2% drop in purchase applications from the previous week. Recall, the previous week purchase apps were down 4%. Purchase apps have now been down 6 out of the last 9 weeks.

Because 90% of new home buyers use a mortgage, the new home sales report should closely correlate with the Mortgage Bankers Association’s mortgage purchase application data. Clearly the MBA data shows mortgage purchase applications declining during most of June. I’ll let you draw your own conclusion. However, I suspect that when July’s number is reported in 4 weeks, there will a sharp downward revision for June’s number. In fact, the Government’s new home sales numbers were also revised lower for April and May. The median price of a new home is down about 10% from its peak in November 2017.

The shipments component of Cass Freight index was down 3.8% in June. It was the seventh straight monthly decline. The authors of the Cass report can usually put a positive spin or find a silver lining in negative data. The report for June was the gloomiest I’ve ever read from the Cass people. Freight shipping is part of the “central nervous system” of the economy. If freight shipments are dropping, so is overall economic activity. Of note, the price index is still rising. The data shows an economic system with contracting economic activity and infested with price inflation.

The propagandists on Capitol Hill, Wall Street and the financial media will use the trade war with China as the excuse for the ailing economy. Trump is doing his damnedest to use China and the Fed as the scapegoat for the untenable systemic problems he inherited but made worse by the policies he implemented since taking office. Trump has been the most enthusiastic cheerleader of the biggest stock market bubble in history. This, after he fingered his predecessor for fomenting “a big fat ugly bubble” when the Dow was at 17,000. If that was a big fat ugly bubble in 2016, what is now?

7 thoughts on “The Economy Is Starting To Implode

  1. The PMI jumps off a 20 story roof
    The Fed jumps off a 50 story roof
    The stuck market jumps off a 100 story roof
    The housing market is the roof.
    It can’t jump off itself but it sure can fall in of itself
    I pity the poor schlubs sitting under that roof
    They’ll think the roof jumpers are the lucky ones when this H Bomb explodes
    And that collapse, in and of itself, will be the cause and the end game of this whole Everything Bubble
    When all you have is a pin everything looks like a bubble
    Start pricking

  2. The Fed has made a total and utter fool of itself during this press conference. It pays to watch Fed chair Powell stutter and contradict himself. If he had said no rate cut, the economy is doing fine, he would have been in line with Fed and government propaganda. If he had said we are easing into an economic downturn, he would have been fine because this is the market consensus. Instead he made a pig’s breakfast of it by suggesting the economy was fine but rates had to be cut as a midterm adjustment and the next move could be up again. This leaves the markets and the economy guessing, which way rates will go. This uncertainty produced a market sell off and I fear that worse is to come. A Federal Reserve with no credibility, apparently run by mad hatters, is a recipe for disaster. Gold was massively attacked almost permanently and the ECB dumped tons of EUROs to support the Dollar and the attacks on precious metals. I expect gold to pick up again from tomorrow onwards (after the end of the wash and rinse operation) and Federal Reserve interest rates go to zero within a year. The Fed will be hounded by wild market swings and Powell will go down in infamy.

  3. Big fat ugly bubble? That’s what the King of Bankruptcy sees when he gazes into the mirror! With a foghorn for a mouth. Wilbur Ross & the red shield gang bailed him out but will they bail out a world they are intent on destroying?… not a chance. Never enough suffering for THOSE gold hoarders. Those creatures thrive on it.

  4. A commercial signal failure (CSF) occurs in the commodities market when the amount of demand for physical delivery of a commodity – in this case gold – exceeds the ability to physically deliver the available supply by those obligated to deliver. In this case that would be the parties who have sold short the Comex gold futures contract (primarily Goldman Sachs, JP Morgan, HSBC and Deutsche Bank).

    A CSF cannot happen because the Comex sends these EFPs to the LBMA to be satisfied there over time. These are either settled in cash and/or another gold futures contract(s) and really no transparency as to what really happens.

    The world needs a new price discovery mechanism for both gold & silver and permanently end the Comex/LBMA pricing fraud. Until this happens, the world is a prisoner of these pricing fraud entities.

    1. Fred,

      Good comment, and you obviously know more about the trading than I do. But as you say ” These are either settled in cash and/or another gold futures contract(s) and really no transparency as to what really happens.”

      Regardless of what they are doing [that isn’t transparent] they are starting to lose the battle to control PM prices. And as in the past for a while [2009 with silver at least] the retail sales price far exceeded the COMEX price [large premiums]. They could be rendered irrelevant in the future.

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