Paul Krugman and Other Mainstream Trade “Experts” Admit They Were Wrong About Globalization (It Hurt American Workers And MZM Money Velocity)

Paul Krugman, Nobel Laureate in international trade and New York Times op-ed snarker, has finally admitted what many of his already knew: globalization hurt middle class workers more than they thought it would.

Globalization has been a hot topic in business schools since the 1980s, particularly since Bill Clinton favored the North American Free Trade Agreement. NAFTA was opposed by Presidential candidate Ross Perot who argued:

We have got to stop sending jobs overseas. It’s pretty simple: If you’re paying $12, $13, $14 an hour for factory workers and you can move your factory south of the border, pay a dollar an hour for labor, … have no health care—that’s the most expensive single element in making a car—have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south. … when [Mexico’s] jobs come up from a dollar an hour to six dollars an hour, and ours go down to six dollars an hour, and then it’s leveled again. But in the meantime, you’ve wrecked the country with these kinds of deal

In addition to losing middle-class jobs to Mexico and subsequent outsourcing of jobs to China, we have seen a perpetual decline in Money Velocity (GDP/Money Stock) since 1995.

The GINI ratio of US income inequality took a jump-up under Clinton and NAFTA. Although financialization contributed to income inequality as well.

Yes, globalization has helped suck jobs and wage growth out of the USA contributing to a decline in money velocity. So when snarky NY Times op-ed writer Paul Krugman admits that globalization is harmful to American workers (and money velocity), we better rethink what we are teaching in business schools.

Including over-reliance on The Federal Reserve to bail-out flawed Federal policies.

The Unequal Costs of Black Homeownership (Compounded By Bank Regulations And QM Rules)

Ed Golding, formerly of Freddie Mac and now of MIT’s Golub Center for Finance and Policy, has an interest paper on “The Unequal Costs of Black Homeownership.”

“As Keynes noted, a small difference in interest rates can compound to a large number. A new study by the GCFP’s Executive Director, Ed Golding, and two co-authors, Michelle Aronowitz and Jung Choi, demonstrate that Black homeowners on average will pay $67,320 more for their houses because each month Black homeowners pay slightly higher mortgage rates, mortgage insurance premiums, and property taxes. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half. This report will soon appear in the National Association of Real Estate Brokers 2020 Report on State of Housing in Black America.”

Then, on the other hand, black homeownership rates are at an all-time high as is black median weekly real earnings growth.

But Golding et al refer in their paper to “Black homeowners pay higher mortgage rates at origination.”

Why? How about the 16% mortgage denial rate for blacks compared to 9% for whites and Asians?

Let’s start with Laurie Goodman’s mortgage denial research at the Urban Institute. Their analysis revealed that % of loans to low credit households has decreased from 53% in 2006 (peak of the housing bubble) to 24% in 2017.

How about Fannie Mae’s and Freddie Mac’s average credit score of loans acquired? They rose over 25 basis points.

  • Thanks to my GMU FNAN 421 students for using Python to download and analysis Fannie and Freddie on-lined data.

While it is easy to blame Fannie Mae and Freddie Mac for increasing credit standards versus 2006, there are other mitigating factors … like the CFPB’s Qualified Mortgage (QM) ruling.

All qualified mortgages should generally meet the following mandatory requirements:

1.The loan cannot have negative amortization, interest-only payments, or balloon payments.

2.Total points and fees cannot exceed 3 percent of the loan amount.

3.The mortgage term must be 30 years or less.

Qualified mortgages must also satisfy at least one of the following three criteria:

1.The borrower’s total monthly debt-to-income (DTI) ratio must be 43 percent or less.

2.The loan must be eligible for purchase by Fannie Mae or Freddie Mac (the government-sponsored enterprises,or GSEs) or insured by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA),or the US Department of Agriculture Rural Development (USDA), regardless of DTI ratio.

3.The loan must be originated by insured depositories with total assets less than $10 billion but only if the mortgage is held in portfolio.

DTI of 43% or less?

Lenders have increased lending standards and that has been problematic for black households. In that respect, Senator Warren’s Consumer Financial Protection Bureau (CFPB) and The Federal Reserve have differentially-impacted black households given that black households have lower average incomes and lower credit scores than white households.

Lenders deny mortgages for Black applicants at a rate 80% higher than that of white applicants. And values of homes owned by Blacks are still 17.6% below the typical U.S. home.

So, making the financial market “safer” negatively impacts black households. We need to rethink QM and bank capital rules.

Existing Home Sales SOAR In Sept (6.54M Beats Expectation of 6.30M) As 30Y Mortgage Rates Hit All-time Low (2.80%)

More good news for the economy! And housing markets!

Existing home sales in September soared to 6.54 Million units (SAAR), higher than the expectation of 6.30 million units.

Existing home sales are exhibiting a V-shaped recovery.

As Freddie Mac’s 30Y commitment rate hits an all-time low.

Existing home sales hit a 14-year high! Thanks in part to tight inventories.

Median EHS prices hit an all-time high with near all-time low in inventory available for sale.

Venezuelan Annual Inflation Rate Is A Pulverizing 2,025% As Oil Prices AND Production Collapse

In August 2018, Venezuela re-denominated the bolivar, lopping five zeros off it. Today’s price of 25.00 new bolivars is equal to 2,500,000 old bolivars. Converted into dollars, that comes to less than $0.50.

Bloomberg’s Cafe con Leche indicates that a cup of coffee (with milk) in Caracas Venezuela costs 430,000 Bolivars. This is happening as Venezuela’s crude oil basket crashed to 13.74.

This is happening as Venezuela oil production is crashing.

According to Steve Hanke at Johns Hopkins, the Venezuelan annual inflation rate is at 2,025%, over 4X Zimbabwe’s annual inflation rate.

Seasonality Strikes! Mortgage Purchase Applications Fall By -1.96% WoW, Refi Apps Rise By 0.23% (Purchase Apps Up By 26% Versus Same Week Last Year)

Covid through the mortgage market for a loop. Normally mortgage purchase applications peak in late April or early May, but in 2020 unadjusted purchases applications peaked in mid-June thanks to Covid-19.

Here is a chart showing the seasonality of mortgage purchase applications. And how mortgage purchase application are 26 percent higher than the same week one year ago.

Refi applications? Essentially flat with an increase of only

V-Shaped Recovery In Housing Starts/Permits To Build (1-unit Starts Up 8.52% In September)

The housing starts numbers for September were released this morning and point to a V-shaped recovery for housing markets. 1 unit starts were up 8.52% and permits to build were up 7.8%.

This is a V-shaped recovery for single family housing.

Unfortunately, there is no V-shaped recovery in 5+ unit multifamily housing.

But the overall economy is showing a distinct v-shaped recovery, according to The Atlanta Fed GDPNow forecast model.

Lenders Tighten Standards On Credit Cards To Beyond Financial Crisis Peaks

To quote Dean Martin, “Ain’t That A Kick In The Head.” Let ’em have it!

Net % of Domestic Respondents Tightening Standards on Consumer Credit Card Loans just rose to a level higher than that of the financial crisis.

Odd since US home prices are rising through the stratosphere and mortgage rates are at an all-time low. Essentially, homeowners will equity in their homes may have to turn to cash-out refis in lieu of using credit cards.

Yes, cash-out refis (white line) have grown as consumer credit tightens (yellow line).

Like the sailor said, quote, ain’t that a hole in the boat?

All Quiet On The Wall Street Front? US Bond Volatility Jumps, Stock Volatility Calm, Gold Vol Calm, US Dollar Swap Forward Rate Calm

With about two weeks to go until the U.S. election, volatility gauges for stocks and bonds are on different paths. The Cboe Volatility Index — known as the equity market’s “fear gauge” — has been relatively subdued this month in contrast to the ICE BofA MOVE Index, the Treasury market’s equivalent measure.

JP Morgan’s Global Credit Volatility premium index has soared since June while gold’s 3m implied volatility is calm.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF has leveled-out after rising from the Covid outbreak.

The US Dollar Swap forward rate has crashed with Covid and has laid flat ever since.

(A vanilla interest rate swap is an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.)

US Public Debt Now Exceeds Economic Output, US Budget Gap Triples to Record $3.1 Trillion on Virus Relief (M2 Velocity Crashes To All-time Low)

This is a nightmare. A nightmare on Constitution Avenue.

(Bloomberg) — The U.S. budget deficit more than tripled to a record $3.1 trillion in the latest fiscal year on the government’s massive spending aimed at softening the blow from the coronavirus pandemic.

The increase brought the deficit as a share of gross domestic product to 16% in the year ending in September, the largest since 1945, a Treasury Department report showed Friday. At the end of the financial crisis in 2009, the ratio was close to 10% before slowly narrowing through 2015.

Investors have handed the government ultra-low borrowing costs to finance the spending, resulting in a 9% drop in federal interest payments during the year. But the national debt is now bigger than the size of the economy, and it could be almost double GDP by 2050 as an aging population places more demands on Social Security and Medicare, according to the Congressional Budget Office.

The risk is that in the long term, rising debt could end up sparking inflation and repelling investors if the market becomes too saturated. Federal Reserve Chair Jerome Powell and other officials say eventually the debt trajectory will need to be addressed, but now isn’t the time to worry because unemployment remains high and the pandemic has crushed many businesses, warranting further support for the economy.

While the central bank cut the benchmark interest rate to near zero in March and expects to keep borrowing costs very low likely for years to come, lawmakers remain deadlocked over additional fiscal aid ahead of the Nov. 3 election.

The report showed federal spending jumped 47.3% to $6.55 trillion in fiscal 2020, driven by increased outlays for unemployment compensation and small businesses that were approved by President Donald Trump and Congress. Government revenue declined 1.2% as receipts from individual and corporate income taxes fell.


Underscoring the massive fiscal relief efforts this year, the Treasury’s report showed $275 billion in outlays for federal additional unemployment compensation that included the now-expired $600 supplemental weekly jobless payments. Spending for state unemployment benefits totaled nearly $196 billion in the fiscal year.

Spending on national defense went from the second-largest outlay in fiscal 2019 to fifth in 2020 as pandemic-induced spending resulted in larger spending for income security, health and Medicare.

As Congress and the Administration continue the spending splurge, what are the odds that spending (and borrowing) will decline after Covid recedes? Especially with declining money velocity and exploding public debt.