In today’s testimony to the Joint Economic Committee, Chair Yellen voiced concerns about the recent softness in the housing recovery. Her concern should be measured from two perspectives: One, the failure of wages to keep pace with returns on capital, or, as it is fashionable to say, R>G (the new rage inspired by Thoma Piketty). Financial markets have generated far more gains than GDP resulting in the middle-income groups not generating enough income to ignite home purchases. When Yellen worries about housing she is alluding to wage growth, especially as bank regulations have made it more difficult for buyers to secure loans. Two, last year the airwaves were filled with real estate agents raving about how the supply of homes was diminishing and therefore prices had to go higher. The problem with the rosy view from the Zillow crowd is that much of the demand was generated from foreign buyers with cash and large hedge funds and private equity groups buying large packages of distressed properties.
The aforementioned groups both acted to bid the market away from potential buyers and now that prices have climbed demand has dropped. This is another case of covert inflation hampering the buying power of the wage-impaired, middle-income crowd. It is the same problem with the issue of core-inflation impacting demand. When food and energy bills rise and wages remain low, the average person has less discretionary income. While the FED may want higher inflation to ease the burden of debtors, the economic impact in a low wage environment is LESS DEMAND. You do not have to be a Keynesian to know which way the wind blows. Yellen will seek ways to free the system from the SIN OF LOW WAGES. Zero interest rates? Carry on.
***Tomorrow comes news from the Bank of England and the European Central Bank. The consensus is for no change in rates from either entity. The BOE, under the guidance of Mark Carney, will hold rates at 0.5 percent with the rationale that the strong POUND is acting like tightening. Growth in the U.K. has been surprisingly strong, driving the currency to multi-year highs. Governor Carney continues to jawbone the currency lower so there will certainly be no rate hike (especially with inflation remaining so behaved). The ECB will follow 45-minutes later and will also announce no change in policy, leaving the overnight lending rate at 0.25 percent. President Draghi and other Europeans would like to get the EURO lower but will not initiate a negative rate policy yet. Mario Draghi has accomplished much with mere rhetoric and we Europe showing some recent positive signs there’s no reason to waste the monetary firepower. At 7:30 a.m. CST, President Draghi will hold his press conference and that is always worth a listen for the European press, especially the French and Italians, will press the ECB president on the problem of the overvalued euro. It is from this that market volatility will increase as Draghi attempts to talk the euro down while holding off any type of concrete action.
****More news about Europe. In a piece by Benn Steil and Dinah Walker 0n the EconoMonitor, they reveal that the French banks have a $50 billion exposure to the Russian economy.The Germans may be taking the heat for dragging their feet on sanctioning Russia except the quiet from the French is deafening. While some in the media continue to make the Ukraine a simple matter of a unified front by the West against Russia, the more that is known the murkier the situation becomes. The EU has great exposure to Russia in so many areas that the U.S. effort to squeeze the Russian financial system will prove more difficult than the White House anticipates.
Further complicating the issue was an article in the New York Times, “Why Germans Love Russia,” by Wergin Clemens. Both the right and the left in Germany find reasons to defend Russia even as it utilizes heavy-handed policies to affect change in its “near abroad.” As Clemens notes: “Twenty-five years after the end of the Cold War, German society may well be drifting away from the West again. In a poll last month by Infratest/Dimap, 49 percent of Germans said they wanted their country to take a middle position between the West and Russia in the Ukraine crisis, and only 45 percent wanted to be firmly in the Western camp.” The fissures between the various European Union members and the United States will make comforting Russian revanchism in its “near abroad” a very difficult task. The Ukranian crisis will provide instability for global markets for quite a while. There will be no summer doldrums.