Growth or Trust

This morning I had the great pleasure of joining Maria Bartiromo in studio for the last hour of her show on Fox Business. We discussed a wide range of issues from the Federal Reserve to removing the restrictions on oil exports, but given where we are in the election cycle, the subject of Hillary and her emails naturally came up.  The question is, should voters focus on growth or trust?  We spoke with Don Baer, former President Bill Clinton Communications Director, about what he thinks are the key issues for voters.

Spoiler alert – I disagreed!  Shocking I know, me, having an opinion…

The economy is facing some enormous challenges with the number of job openings continuing to be at record highs, while at the same time more and more people are giving up and leaving the workforce, thanks to a deeply structural skills mismatch.  We have a tax code that is so insanely complex that more people are employed in the tax preparation industry than in the auto industry – not exactly a recipe for a productive economy!  We have a regulatory regime that has become so burdensome that many small business owners simply give up or never even get their idea off the ground.

All that being said, I cannot evaluate a political candidate based solely on what they say.  Hillary Clinton put our nation’s security at risk based on her claim that it was more convenient for her.  For the love of Pete!  You carry a purse!  Cell phones aren’t that big and you have an entourage that could carry them both for you should you choose.  Many of the rest of us manage to survive the horrors of carrying two mobile phones.  Her excuse sounds pretty weak to me, which leaves me wondering what the real reason was and calls into question my ability to trust what she says.  So even if she did have compelling ideas for improving the economy, how could I know she’d follow through. The rest of the nation already views those in D.C. with well place suspicion, we don’t need more reasons to doubt the legitimacy of those we elect to govern.

Clinton Email – the final straw?

This morning I had the great pleasure of joining Stuart Varney and his team for an hour in New York. One of the topics we discussed was the fallout Hillary Clinton is facing over her use of a personal server for communications in her capacity as Secretary of State.  She claims she used a personal server so that she didn’t have to carry two phones. Seriously?  And she wants to be President?  She is going to risk national security for her personal convenience yet believes she’d be a great leader of the most powerful nation on earth?  Where does one start?

President Obama and the VA Scandal

I recently was in studio in New York, speaking with Neil Cavuto on the latest scandal facing President Obama’s Administration over the treatment of Veterans by the VA , involving alleged deception about the waiting time for treatment at veterans hospitals.   While it would be easy to say that this is the fault of an incompetent administration,  the reality is this is simply another example of why the size and scope of government ought to be limited.  Today the federal government is simply to big to succeed!

With Stuart Varney on the Housing Market

With Stuart Varney on the Housing Market

I always seek to look below the headlines, assessing the underlying data in a more rigorous manner than you often see in the popular media and with a longer term perspective. Earlier this week I spoke with Stuart Varney on the Housing Market.  The topic warrants a thorough discussion as it is such an impactful part of the US economy outside of its direct contribution to GDP.

Earlier this month we learned that the National Association of Homebuilders Housing Market index sagged to its lowest level in a year in May, declining to 45 from 46 in the prior 3 months vs expectations of a rise to 49. Existing home sales have increased a little since 2010, but are now falling dramatically, dropping 7.5% on a year-over-year basis in March. New housing starts also down by 5.9% in March on a year-over-year basis. According to Zillow, close to 1/5th of U.S. homeowners are underwater in their mortgages. Late last week we learned that sales of new U.S. single-family homes rose more than expected in April and the number of homes on the market hit a 3-1/2 year-high. Overall it’s been a mixed bag, but what exactly are we hoping to see and why?


Home ownership rates have fallen to where they were about 20 years ago at 64.8% in Q1. This is the lowest rate since Q2 1995. The rate peaked at 69.2% in June 2004. Such a decline sounds bad… or is it? Is a high level of home ownership really the Holy Grail for a society? Is more always better?


Our interpretation of the data indicates that the peak of home ownership is not something to which we ought to aspire. Not household should own the place in which they reside as the costs and risks cane easily outweigh the potential benefits. Home owners can’t easily move if they need to change jobs. We’ve seen the impact of this in the way the current labor market has been the most inflexible with respect to geography in history. They are unable to rapidly react to changing conditions in the economy that affect their household finances, not to mention the hassle of home ownership and all the costs that are unimaginable beforehand. As a home owner myself, I have seriously questioned the sanity of my purchase decision on many a Sunday spent nursing wounds, covered in Band-Aids post-umpteenth unsuccessful trip to Home Depot during one of my “I am so Bob Vila” weekends.

Why did home ownership rates increase so much pre-financial crisis, to levels that were clearly unsustainable and caused so much pain for so many? Was it just those evil, greedy bankers that somehow tricked people into buying homes? Well, that’s partially true, but is only part of the story and a misleading take on all that happened.

You can also thank the federal government for handing over another example of what I like to call, Lenore’s Law of Unintended Bureaucratic Consequences whereby that which a bureaucrat tries to help is ultimately harmed by the interference. Traditionally non-FHA mortgages required a minimum of 20% down, but in 1994 the Department of Housing and Urban Development (HUD) ordered Fannie Mae and Freddie Mac to supplement and eventually to far surpass the FHA’s efforts by directing 30% of their mortgages to low-income borrowers when previously the number had been much lower. This became pretty tough to do, so to meet that goal, Fannie Mae introduced 3% down mortgages in 1997.

In 2000 HUD increased the low income target to be 50% of all loans. Now think about that, what bank in their right mind would want to make 50% of their loans for the year to low income families with exceptionally low money down. That means 50% of your loans are in the riskiest category! To accomplish this Fannie launched a 10 year, 2 trillion dollar “American Dream Commitment” program to increase home ownership rates among those who previously had been unable to own homes. So when the government gets itself all focused on getting people into homes who previously couldn’t afford one, is it really all that shocking that home prices rose like crazy?

In 2002 Freddie joined with the “Catch the Dream” program to accomplish essentially the same thing. Then in 2005, HUD increased the target for low income loans again to 52%! Now here’s a bit of irony. The government wanted more people to own homes, so it makes it easier and easier to get a loan. Now we’ve got more people out in the market to buy homes. Son of gun prices go up. Well now isn’t that exciting! Buying a home looks like a really great investment because the prices are just going through the roof! But wait, rising home prices are great for only half the equation. They are great for the owner who looks to sell but not much fun for the person trying to buy. So in their attempt to increase home ownership by making it easier to buy a home, the government made homes even less affordable.

Oh but that’s OK as Fannie and Freddie are there to save the day and get you into that home that you really cannot afford with little to no money down and a variable rate mortgage that isn’t a ticking time bomb at all! All these subsidies increased the supply of mortgages to low income homeowners, but what was the source of the money to fund these loans? Welcome to the Mortgage Backed Security. Yes, those weapons of mass destruction. Banks would pool together mortgages that could then be sold as a MBS, and with HUD’s desire to get Fannie and Freddie to increase home ownership in the subprime areas, these two agencies were more than happy to back the MBS, which, because they are government sponsored entities, turned subprime loans with very little money down into AAA rated bonds! Serious fairy dust isn’t it? Now the banks were running around gobbling these things up like there’s no tomorrow. Why you ask? Well according to the Basel Accords, banks could seriously lower their reserve requirements by holding these GSE (Government Sponsored Entity) AAA rated bonds, which improved their profit margins.


So here we are supposed to all be fixated on getting us back to the essentially Fannie and Freddie heroin-like-induced excessively high levels of home ownership, when the household balance sheet is in no condition to go there. The personal savings rate is less than 4%, lower than it was in the 1930s and continuing to fall. It is at almost unprecedented low levels in the 81 years of data we have. Abysmal savings yet we want to induce people to buy homes?


The percentage of the population actually in the workforce is where it was over 30 years ago, so we have a lower percentage of the population working, but we want a higher percentage of the population buying a new home?


Oh but we’re told that households deleveraged, it’s all good. Well, if you look deeper into the data, households didn’t reduce debt other than mortgages and that reduction was mostly due to write-downs, meaning the bank got involved and things got a bit ugly for a while. Not exactly a healthy process for the economy.


What about those homebuyers?

  • The first-time homebuyer in the US has been virtually non-existent. Housing bulls will assume that this means there is pent-up demand, which sound reasonable, unless the reasons behind this decline are deeper changes in the makeup of the demand for housing.
  • New household formation is still exceptionally low, which is a key step in the process of buying a home.
  • Young adults are living at home at higher rates, and polls show they are pretty comfortable living with Mom and Dad, unlike earlier generations that just couldn’t wait to get the out of there.
  • There is a disturbing trend in homebuilders who are designing more and more homes with multiple entrances that make it more comfortable for multiple generations to live under the same roof. This is not a good sign if we want more people to own a home when we see a trend that increasing numbers of them are looking to share just one!
  • Student loan debt is exploding while delinquency rates are also rising despite the story that the economy is improving. Want to know why? One reason may be we graduate more kids with degrees in psychology than in math, physics or engineering. The economy may be limping along, but maybe with all those newly minted psych majors maybe we won’t feel so bad about it?
  • The MacArthur Foundation recently conducted a poll that found that renting is more appealing than buying a home by a 30% margin, consistent across all age brackets.

On May 29th, pending home sales look to be coming in lower, with soft foot traffic, rising prices and higher mortgage rates relative to last year are likely to continue to be headwinds to demand for new and existing homes sales.

Bottom Line: When investing it is critical to go into much greater detail than the headlines or lead story provide. At Meritas we go much deeper to understand the longer-term underlying trends and the critical factors that affect the headline topics. Housing has thankfully made a significant comeback in recent years, but we are skeptical that the improvements in 2013 will continue for the next few years without significant strengthening in the economy.

Obamacare and the Orwellian Oath

Obamacare and the Orwellian Oath

On February 18th, I spoke with Charles Payne and Julie Roginsky on Fox Business’ Cavuto show about the headlines claiming that Obamacare aka the Affordable Care Act (ACA) will harm jobs. We had a lively debate, which was surprising given that the three Sports Illustrated models gracing this year’s cover were waiting in the green room, an understandable distraction for many! Got me thinking that perhaps I ought to entertain the idea of becoming the first “bikini economist.” No sure that my supply curves would stimulate like claims around QE, but I digress…. For all the administration’s protestations that the ACA isn’t going to harm jobs, their own actions show they know it is. In a press briefing last week Treasury officials made it clear that firms will be required to certify to the IRS under penalty of perjury that ACA was not a motivating factor in their staffing decisions. So… to protect your company from the increase in costs from ACA you must swear that you are not trying to avoid the impact of ACA. But I thought this wasn’t a problem for jobs? If it has no impact, why the Orwellian oath? To be fair, the CBO doesn’t exactly say that jobs will be lost, but rather that ACA discourages work, particularly for those at the lower end of the income scale, in that you get bigger subsidies the less you make. Talk about a poverty trap! When did rewarding people for NOT trying to improve their circumstances become the American dream!? What kind of senseless drivel has the national conversation descended into when Jay Carney assures us that rather than “disincentivizing” these subsidies allow people to “pursue their dreams” without having the terrible burden of working. And just who is paying for these people to pursue their dreams? Oh right, those who STILL WORK! What about their dreams? Their desire to pursue other leisure activities? I guess it is OK to put those on hold so that they can involuntarily support the pursuit of dreams for those who choose to not work! Oh, and wait a minute! I thought this was all supposed to be good for the economy. Now how in hell does having fewer people working or having people work less grow the economy? So far the ACA gives us three little gems

  1. The employer mandate discourages hiring. No point in arguing that fact since firms now have to certify that it didn’t alter their staffing decisions!
  2. ACA delivers $1 trillion in tax increases . What does Congress do when it wants less of something, like smoking tobacco or using fossil fuels? Tax it! So again, can’t argue that this is a negative for growth.
  3. Now the CBO acknowledges that the $2 trillion in subsidies discourages work, but hey, how great is it to pursue leisure interests at the expense of your fellow taxpayer?

Well… at least you get to keep your insurance if you like it.

American Income Levels Stagnant for over 20 years!

American Income Levels Stagnant for over 20 years!

On February 13th, at I must add the ungodly hour of 6:30am PST, I spoke with Stuart Varney on Fox Business concerning the dismal state of income levels in the United States. According to the US Census bureau, median household income is just over $51k, which is about where it was 20 years ago! We also just learned that real disposable personal income has fallen by 2.7% from a year ago, the biggest collapse since the semi-depression in 1974!  American income levels have been stagnant for over 20 years.

On top of weak income levels, the employment situation continues to be of great concern. US unemployment rate is now at 6.6%, but this measure has become relatively meaningless as it no longer accurately describes what is happening in the work force. A more descriptive measure is the labor force participation rate, meaning the proportion of the population either employed or looking for employment as a percent of the population. That number is down at 63%, a level we have not seen since 1978! If the labor force participation rate were still at pre-crisis levels, the unemployment rate would be closer to 13%. Some argue that the decline in the labor force participation rate is primarily driven by the inevitable retirement waves of the baby boomers. However, the chart below illustrates that baby boomers are in fact participating in the work force at a higher rate than in decades, for women we are at all-time highs.

With income struggling, it should come as no surprise that savings levels are well below what they ought to be for a financially healthy country. The IRS’s most recent Quarterly Statistics of Income Bulletin is for the 2010 and 2011 tax filings, so it is a bit dated, but nonetheless, very insightful as to trends. According to the release 145.6 million taxpayers were eligible to contribute to an individual retirement account (IRA) in 2010, but only 3.5 million actually did so and of those that did, 62% were over 49 years old. Uh oh! Only 2.4% of those eligible to contribute to their IRAs did so. The average account value is only $92,000 and only 27.6% of all tax filers even have an IRA. Lastly, that wee bit of spending spree we experienced in December? With income struggling, that was funded by consumers dipping into their piggy banks to the tune of $46 billion causing the personal savings rate to fall from 4.3% to 3.9%, the lowest since January 2013.

NSA Surveillance Impact Overseas

On February 10th I spoke with Neil Cavuto on how NSA surveillance affects international communications.

I work internationally, dividing my time between San Diego, California and Italy. I sometimes advise on deals that have involving high-profile, publicly traded companies and the actions my clients take are significant enough to affect the market.  Now whenever you are talking about large amounts of money, someone will always find information valuable.

So… aside from the obvious obscene Constitutional violations by the NSA, their spying has a material effect on how we now communicate, specifically on how non-American entities conduct their business with Americans and with each other. The world has been put on notice that communications, which in anyway interest the US, are subject to interception by an agency that has shown it doesn’t have its house in order and its use of that information is uncomfortably vague.
Some companies in Europe have even taken steps to ensure that their communications do not get routed through any servers that they believe the NSA may observe.  Of course we really have no idea just how pervasive the NSA’s program truly is, so an overabundance of caution is required.
So now, when I am outside the US and I send an email to the US, I have to first think of which account to send it from based on what I’m saying and whom I’m sending it to.  When placing calls from outside the US to firms with whom we work in the US, I am conscious that someone may be listening and cannot trust what they may do with what they hear.  What if I place a call from somewhere like Dubai or have a conference call on with someone from there to a financial institution in the US?  Does that raise any red flags for the NSA?  Would someone then listen to that call?  I have to think about how to protect information that cannot be released before we are ready, which adds more friction to the system. That is not exactly helpful in an economy that is struggling.  Why make it harder for us to work done?