Thursday, July 10, 2014

You don't say.

Bank profits looking gloomy, and here's why.

" Bank executives have been preparing investors, with warnings from JPMorgan Chase and Citigroup regarding substantial trading losses that will impact earnings. Whalen also cites lower mortgage lending, declines in interest earnings and rate uncertainty from the Fed as further challenges. "

Translation. Waaaaa. We don't know if the Fed is going to keep shoveling us money to keep us alive.

I think the Fed has painted itself into a very painful corner. The butt hurt kind. It wants to stop assert purchases. Allegedly. I think that is fantasy. Today you wouldn't have to work that hard at getting an interest rate just slightly above 4%. If you have super good credit. It's been bumping along these levels for a couple of weeks now. That tells me that housing demand is super weak. When housing demand had a pulse, it started ticking up to the 4.5% range. Rates tried to bump up into the 4.17 range yesterday, only to be back around 4.3% today.

During the recession Mr S. and I had countless conversations about the relationship of inflation and deflation had on people. I've never lived through deflation before, so it was hard to understand the psychology of how people would react. My feeling is that people will actually tolerate a lot of inflation because we are stupid monkeys. We are geared to desire things that are expensive. Given two equal choices, people will often pick the higher priced item if it gives them not much more than status. Mr S.'s feeling was I was probably right - until it came to items they used every day. Like food. And oh how right he was. It wasn't until food started spiking that people really started to become freaked about inflation. They didn't even seem to care that much about the way housing prices were spiking to the sky. I was fascinated by it a few months ago, because they were so complacent and I was running for the exits. Maybe I can dredge up where I blogged about it. Inflation seems to trick people into feeling things are better than they are. To a certain point I guess. I don't know if I've lived through more than 4% inflation, so I guess maybe one day I will get to see what happens when it's over 4%. In two or three years I'd guess. Normally I'd predict next year, but Obamacare has yet to suck the life out of the economy. Never fear though! Open enrollment for corporations is coming up fast and furious.

So.. here in lies the problem. I believe the drought is causing inflationary pressures that absent them, the picture would look very different. A couple of weeks ago when I said that deflation would probably return by the end of the year - it probably seemed crazy to most people. Some of the early same store sales only reinforce my belief. Lumber liquidators cut their earnings forecast by half! Which truth be told, if that store died, I wouldn't feel sad. That CEO was so up the butt of President Money Bags I vowed to never buy anything from them. This is the environment they voted for. I hope it burns like the surface of the sun.

But it isn't just them. Family dollar came out today and said their earning fell by a third which even made my eyes grow wide. Even Walmart had to admit the consumer was struggling. These are not things that shout inflation. These are things that shout deflation. And really IMO, all you have to do to figure out inflation it take the definition quite literally.

While there is too much money in the system now, there are not too few products and services. Both of those things have to trigger at the same time for there to be inflation. Example housing. Too much money chasing too few houses equal inflation in housing. Food - too much money chasing too few products and services equals inflation in food.

A few years ago people were freaked about hyperinflation. I was too. This is where is becomes super obvious that money printing isn't the only element in inflation. The other half of the equation has to trigger too. Too few products and services. Japan has been in deflation for a decade or more, and they devalued their currency by half! I've lost track now, but they print money every two days. I thought inflation might take hold there this year, but you have to pay for printing money - and people know that. So they don't spend. Or if they do - they spend to hoard like appears to be the case before the tax increase took affect there.

So no.. I don't believe at all they will quit printing money this year. I could be wrong. I just don't see how it happens. The refi segment of banking is just torched. Unless the world ends you are not going to get a better rate than 3.5%. So everyone that refi'd in the last five years will probably never refi their mortgages again and they will also sit in these houses longer. This causes the market to be illiquid. It seems obvious now they are having a hard time pushing up the top end of people who are still underwater who might be inclined to sell. I'm even becoming doubtful of how many of those people there still are. I know a guy who is still paying 7%. I was shocked his refi hasn't gone through yet. He's been working on it most of the year. But he seems totally adapted now. Sure like everyone else, he's had to bust his ass harder. But he's held onto his shit and it looks like he's going to wait it out like I did.

And they say they are going to raise rates? Uuuuuuum. Okay. I say this party is just getting started.

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