Here We Go Again—Swell Numbers Which Aren’t



By David Stockman

According to the financial press we have had some swell economic numbers in the last two days—so it’s giddy-up-and-go time for the stock market again. Thursday’s industrial production number was allegedly gangbusters and today’s housing start figure for October was described as a “boom” by the incorrigible headline writers at MarketWatch:

The Commerce Department on Friday said October housing starts surged, rising 13.7% to a seasonally adjusted annual rate of 1.29 million.

Obviously, “surge” is a very different thing than “flat” or “punk”, but those latter terms are exactly what was reported by the Commerce Department this AM.

Last October, for example, single family housing starts posted at a 871,000 SAAR (seasonally adjusted annual rate) and for October 2017 they came in at 877,000. Recalling that this minute difference represents an annualized rate, what we are really talking about here is roughly a 500 start gain for the month of October on a Y/Y basis. And that’s for the entire US of A where the total housing stock consists of about 135 million units!

So we’d be inclined to call the housing number flat and move on.

But when actually viewed in historic context, “punk” is the better word for it. As shown in the chart below, after 101 months of so-called recovery from the May 2009 bottom, we are still 51% below the pre-crisis peak; and, in fact, the “surging” number reported for last month is the same annual rate as was posted back in June 1991.

That’s right. With respect to the heart of the housing market—new construction of single family homes—we are back to the future of 26 years ago.

Moreover, that’s also to ignore the fact that the US population has increased from 253 million to 326 million in the interim; and, more importantly, there has also been a 33% increase in the number of households needing shelter. That number is up from 93 million to 126 million.

So as the man said: Context please!

To be sure, there are other factors at work that influence the trend of single family starts. These include the over-building during the Greenspan subprime/housing boom, and also the fact that single family housing affordability has withered dramatically for young households burdened with student debt and wage earning families who have been left behind in Flyover America. Both have been forced to become renters and apartment dwellers.

Then again, if you look at the figures for apartment units (5-units or more), you also find not an awesome rising trend of recovery, but radical volatility along a plateau that has been in place for better than four years since mid-2013.

In the first place, therefore, it’s readily apparent why the total housing starts number “boomed” in October: this month’s 393,000 unit SAAR was up by a whopping 73% from September’s hurricane impacted and aberrantly low 286,000 unit figure.

But the skunk in the woodpile there is the comparison to last October’s SAAR of 447,000 apartment units: On a Y/Y basis this year’s starts were actually down by 12%.

You only need to glance once at the chart below to realize that the annualized monthly numbers for apartment units are a close approximation to statistical noise. On an actual within month basis, October 2017 was up approximately 8,000 units from September and down 4,500 units from last October. Again, highly volatile readings but not big numbers in the scheme of things.

Nevertheless, it doesn’t take too much squinting at the chart below to recognize that apartment unit starts—which are almost entirely subsidized by cheap Freddie/Fannie/Fed financing—– may well have already peaked for this cycle. On a rolling six months basis (May through October), last year’s SAAR averaged 401,000 units and the comparable 6-months figure for 2017 is just 330,000.

That’s a long enough time frame to substantially wash out the hurricane effect this year, but the rolling rate is still down by nearly 18%. In short, even what has been the “growth” segment of the housing market—-apartment buildings—-is weakening rapidly, not surging.

You might well wonder why Wall Street likes to have its “in-coming data” sliced into such brief time-packets—-given the enormous potential for distortion and confusion that results. The answer, we believe, is the belief of the casino’s smart money traders, robo-machines and Keynesian economists that they can get an “edge” by reading the “high-frequency” data.

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Obviously, looking at smoothed and extended trends— like the above 18% decline in apartment starts over the last six months—- gives a true reading on the state of this particular precinct of the macroeconomy. But it also doesn’t give any short-term trading signals; there’s no edge or instant divination about where the economy is heading in the next week or 30 days.

Needless to say, from the point of view of capitalizing the permanent earnings capacity of a company or even the entire stock market, “high-frequency” data is useless at best, and generally misleading. Surely, the utterly aberrant 73% rise in October apartment unit starts says absolutely nothing about the direction of the US economy, and would actually be misleading with respect to the outlook for apartment construction companies—-since the trend is sharply down, not springing skyward.

Then again, if what is happening here is Keynes’ famous beauty contest, high frequency data makes sense. The good professor observed that beauty contest judges pick winners based on what they think others will judge, not the inherent beauty of the contestants. Likewise, the algos are programmed to buy the “up” number because that’s what the historic data shows other traders do.

In short, the so-called stock market now consists entirely of what amounts to day traders and HST (high speed trading) machines. There is no “price discovery” in the classic sense of divining the true economic and political fundamentals because the casino has become entirely a ward of the central banks.

The latter drive bubbles and valuations ever-upward until they eventually collapse of their own weight. In the interim, the Wall Street gamblers ride the wave by being net long—even as they pick-up extra nickels and dimes trading the high-frequency data packets issued by Uncle Sam and other sources.

As we said earlier this week, monetary central planning corrupts financial and economic information flows entirely. But what is really evident here is that there is no special reason why the likes of MarketWatch, Bloomberg or Reuters even bother to publish 200-word on-line narratives about the in-coming data anymore; they would be better advised to dispense with the bother, and just mainline the headlines straight into the HFT networks.

At the end of the day, of course, honest price discovery is all about getting the capitalization rate (or PE multiple) right with respect to the current stream of reported earnings. But that’s exactly where the high frequency data obsession of the casino traders and gamblers obfuscates the useful information generated by even the government’s ragged statistical mills.

Thus, yesterday’s allegedly sizzling 0.9% increase in October industrial production said far less about the appropriate PE for domestic stocks than did the trend and context in which it was embedded. To wit, it screamed out once again that it is late in the business cycle and that cap rates should be falling—not floating in the nose-bleed section of history—because the basic growth capacity of the US economy has apparently vanished.

As to the late cycle part, the index is still below it December 2014 high, and has barely recovered from the pig-in-the-python effect of the global commodity deflation. The latter first emanated from the slowdown of the Red Ponzi after 2012-2013, and then temporarily rebounded in 2016-2017 owing to China’s Coronation Boom—-a giant $6 trillion credit impulse that lifted the global economy in the run-up to the 19th Party Congress.

But the more important signal is that we are now 120 months from the pre-crisis peak in November 2007, yet the compound annual growth rate of the index is just 0.08%. Which is to say, nugatory.

By contrast, every prior peak-to-peak recovery shown in the graph below pales that tiny beep of white noise into insignificance. Thus, between July 1981 and the July 1990 peaks, industrial production expanded at 2.18% per annum during the so-called Reagan boom.

Likewise, during the Greenspan tech boom of the 1990s, the CAGR for industrial production was 4.02%; and even during the highly artificial and unsustainable Greenspan housing boom between December 2000 and November 2007, the index rose at a rate of  1.31% per annum.

So Thursday’s industrial production number for October actually signaled that the US industrial economy remains dead in the water; it is floundering in a manner that is off the historical charts—and not in a good way.

Needless to say, the Russell 2000 (RUT) basket of small and mid-sized companies that live preponderantly on America’s main street sooner or latter must track industrial production—-and its secondary effects through distribution, transportation, commercial construction and the other support and supplier industries.

Yet given the above chart, the question recurs: Why would anyone in their right mind value the RUT at 100.56X earnings?

That’s were it is today. You can look it up in the papers—-the Wall Street Journal, that is.

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