Morning Report: Housing starts and building permits are flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2067.1	-3.5	-0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.58%	0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.68

Markets are flattish on no real news. Bonds and MBS are flat as well.

Housing starts came in at 1.16 million in May, a tiny decline from the downward-revised April number. Building Permits rose slightly. Starts rose the most in the West and fell the most in the Northeast. It is amazing that we have a shortage of housing and are building very little. Take a look at the chart below: It is housing starts divided by population. We have just barely touched the low from the 91-92 recession, which also was the result of a frothy real estate market. If the government wants to get the economy going, it should be asking the question why housing is still so depressed in the face of such tight inventory and high demand. 

The Brexit campaign is on hold after a member of Parliament was murdered yesterday. Officials don't have a motive, however there have been calls on both sides to tone down the rhetoric. 

The current global economy resembles the 1930s in many ways, and can help explain why the Fed is going so slowly in raising interest rates. Of course there are major differences as well - rates didn't go negative in the 1930s, the world was on the gold standard, and capital was much less mobile. Still, we have a recession in the aftermath of an asset bubble and the hangover is debt that needs to be worked down. The Fed is trying to avoid the mistake of the 1937 "depression within the depression" where they hiked rates too quickly. Of course by that time, FDR was on an anti-business tear with the undistributed profits tax, and that certainly put a wet blanket on business investment. 

The most deadly words in investing are "this time is different." That said, we are in a world of negative bond yields, and massive central bank balance sheet growth, which you won't find in your Econ 101 textbook. This time is indeed different. Or, is the answer more simple: we are in a bubble for sovereign debt? When you are purchasing a German Bund for no yield whatsoever, the only reason why you would make that investment is because you anticipate a capital gain - in other words you are making the investment on the "greater fool" theory. Which is of course no different from paying 60x earnings for Cisco Systems in 1999 hoping to flip it to someone willing to pay 61x earnings. Or flipping condos in Palm Beach for that matter. 

I went on Louis Amaya's Capital Markets Today podcast after the Fed decision and discussed the Fed, the economy, housing and regulations. You can hear the podcast here.