Home > Federal Reserve, Housing, Theory, TIPS > A Broken Record But It’s A Good Song

A Broken Record But It’s A Good Song

There has been a bunch of new data over the last couple of days, but I am afraid that all of the new stuff will not keep me from sounding like a broken record.

Consumer Confidence jumped yesterday, but more interesting is the fact that the “Jobs Hard to Get” subindex rose to the highest level since late last year, suggesting that weak jobs data isn’t entirely a one-off. Today, the ADP report was weaker-than-expected, at 119k (versus expectations for 150k) and a downward revision to last month. The Chicago Purchasing Managers’ Index on Tuesday was the weakest since 2009, but the ISM Manufacturing report today was on-target. Still, neither manufacturing index is generating much confidence that the economy is about to take off, and the early-year bump has been entirely reversed (see chart, source Bloomberg).


The Shiller Home Price Index, reported on Tuesday, was higher-than-expected at 9.3% year-on-year, rather than the 9.0% expected (and versus an 8.1% last!). What’s really interesting about this is that the recent surge in year-on-year growth has come because the usual seasonal pattern that sees prices sag in the springtime hasn’t been in evidence this year – accordingly, the year-on-year comparisons have gotten easier as prices have gone sideways rather than falling as they tend to do between August and March (see chart, source Bloomberg).


That’s interesting because such a phenomenon was also a condition of the bubble years prior to 2007 – prices generally rose steadily with only a hint of seasonality. Post-bubble, if you wanted to sell your house in February you had to offer a concession on price. Those concessions aren’t happening any more, which is a back-door confirmation of the overall price action.

As I have said before, ad nauseum, we are seeing slow and/or falling growth and firm and/or rising inflation in the pipeline, and that’s not at all inconsistent. Mainstream economists, and journalists of all stripes, seem to accept as a fundamental verity the linkage between growth and inflation, but the only minor problem with this firmly-held belief is that it ain’t so. Growth is bad, and inflation is still going to go up. In Q1, core CPI rose at a 2.1% pace, and I still think that for the full year core CPI will rise at 2.6%-3.0%.

I want to add a quick word here about a thesis that has been advanced recently. The thought is that if the abrupt housing demand is coming from investors rather than consumers, then rising housing prices might be consistent with pressure on rents. I think it’s important to clear up this confusion. Microeconomics tells us that when the price of a good goes up, the price of a substitute tends to rise as well. It is possible, if the overall price level is flat, that a phenomenon such as is described in this hypothetical could happen, with home prices rising and rents falling. But what is much more likely is that rents simply go up more slowly than home prices, so that they decline relative to home prices, rather than declining absolutely. This is, in fact, what we see historically: large increases in home prices tend to lead to increases in rents, but not of the same magnitude, and vice-versa. Whether the mechanism for this is a systematic institutional investor presence or just a large number of one-off instances of individuals renting out their second “investment” homes doesn’t really matter. Accordingly, I don’t expect to see a drastically different course carved out by the rental/home price relationship from what it has been historically. The main difference may be that the lags between home prices, inventories, rents, and so on might get screwed up somewhat, if institutional investors cause this to happen in a more organized way than the organic way in which it usually happens.

Another aside: there has also been a lot made recently, especially in commodity markets, about weak data from China. It is amazing how important it is to global commodity markets that China grows at 9% and not 8%. If I were a member of Chinese leadership, I would be trying to convince my data bureau to release slightly weak figures, since every time it does the hedge funds of the world offer large amounts of commodities as discount prices, which is just what a growing economy needs. It’s not like anyone believes the figures when they are reported to be high; I wonder why we believe it when they are reported to be low?

In addition to the data today, the Federal Reserve finished its meeting and announced no change in monetary policy for now. And there isn’t one coming for a while, either. There was no important change in the statement, although the Fed did take care to remind us that it “is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” [emphasis added] That’s comforting. But the simple fact is that the economy isn’t going to be booming any time soon, and the Committee isn’t going to taper its purchases unless it does because they labor under the delusion that they’re helping. Perhaps next year.

For the rest of the week, investors will be focused on Friday’s Employment Report. I am not really worried about the report being weaker-than-expected, because from everything I read it seems that the market is already anticipating something close to Armageddon (or at least, that’s how they are explaining the continued pressure on breakevens and commodities). So far, this is a routine slowdown that might be slipping into a renewed recession. Meanwhile, expectations on Friday are for Payrolls of 145k, up from 88k but down from the pace of the last year. And the ‘whisper’ number seems to be lower than that. I suspect the more likely surprise is that there is an upward revision to the 88k and the number exceeds estimates. Somehow, that will be also perceived as a negative for breakevens!

TIPS suffered today, even as nominal bonds rallied. Our Fisher yield decomposition model currently suggests that TIPS are as cheap, relative to nominals, as they have been since early September last year (when 10-year breakevens were at the same level they are at now). I am quite bullish on breakevens from here.

  1. Eric
    May 1, 2013 at 4:58 pm

    Sorry for spamming your comment box lately, but you’ve been writing great stuff and this market has me more flummoxed than usual.

    A comment on the house price rent business: In _general_ I agree with you argument about substitutes. But isn’t there an unusual phenomenon going on here? Namely, that because of the fed or perhaps other reasons, investors are willing to accept lower and lower returns on their investments. We see this in the bond market, both nominal and IP, and in the stock market. And I guess the argument goes that as long as this phonemenon is also playing out with investors in the housing market (especially via vehicles like these new single family unit REITS), you might very well see a rise in prices and a concomitant fall in rents. Anecdotally, I’ve heard that farmland prices are going through the roof, but ag. commodities are in the toilet. Is this phenomenon any different?

    And if an when this phenomenon ends (as I _guess_ it _eventually_ will) aren’t we more likely to see the asset prices go down then the earnings (in this case rent) go up?

    • May 1, 2013 at 6:00 pm

      Okay, you’re on to something here. The rental yield of housing should be falling, just as all other yields are falling…which means that the price of a house should be rising RELATIVE to the level of rents. But you get back then to what I’m saying (which is the same then as what you’re saying): both rents and home prices can go up, but the latter more than the former.

      It doesn’t quite parallel the farmland example, because the substitute for farmland isn’t a crop. The substitute for owned farmland is rented farmland, and I don’t think farm rents have been falling. The value of farmland in terms of this year’s produce is very high, but it isn’t clear to me that it is high in terms of the future stream of produce (and of all alternative uses of the land if produce prices stay low, right?).

      But I think you are exactly right about rental yields. They should be, and I suspect probably have been, falling.

    • May 1, 2013 at 6:00 pm

      …p.s. write as many comments as you like! That’s why I like this medium!

  2. Jim H.
    May 2, 2013 at 10:24 am

    ‘TIPS suffered today, even as nominal bonds rallied’ … forcing me to step up to the plate and buy some more of them. I trust that the QE5 campaign of Bernanke’s successor, Janet Yellen, will torque the CPI higher and finally end this tiresome negative housing equity crisis for good.

    Recently I was shocked to learn that IB, one of the (allegedly) more sophisticated retail brokers, doesn’t even offer TIPS. You can trade Osaka rice futures or Polish zlotys on their platform, but a trillion-dollar market of domestic sovereign linkers ain’t on the menu. Maybe they are just protecting innocents from the heartbreak of negative yields.

    • May 2, 2013 at 10:35 am

      I know. We use IB to run some of our simpler ETF-based strategies…and I’d LOVE to be able to buy TIPS there and run some of our other strategies. But not only do they not offer TIPS or any other global ILB, they seem to have no plans to do so either. Crazy.

  3. John V. Nash
    May 2, 2013 at 12:32 pm

    Mike another good post and I am sure everyone who follows this blog is waiting for QE to end. When I think about 85 billion a month and how reckless the fed is, how many large companies could the fed buy every month, and growth is flat. 1.63 on ten year while spx hits all time high.

    Date: Wed, 1 May 2013 21:33:04 +0000 To: jvnash1@hotmail.com

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