BEA Now Using International Trade Data For GDP Estimates

The BEA has acknowledged the problem with huge revisions to the GDP. As a result, the BEA will now use data from a new report called the International Trade In Goods. As you might already know, I’m big on international trade and have certification in the subject.

gdp-joke-memeThe U.S. Census Bureau released its first advance International Trade In Goods report. The advance international trade deficit in goods expanded to $62.3 billion in June from May’s $59.8 billion. Advance exports of goods were $126.6 billion and advance imports of goods were $188.8 billion. Exports were down -0.4 percent on the month while imports were up 0.7 percent. The rising value of the U.S. dollar is having a big negative impact on U.S. export sales.

The BEA will incorporate this new data into its estimates of exports and imports for the advance GDP estimates. This is expected to reduce the size of revisions to GDP growth in the second estimates.

While this doesn’t make the 46% revision to the 2013 GDP any better, the BEA has probably successfully maneuvered out of the possibility of a full-on Congressional investigation into their activities. At the very least they will be able to say that they are taking concrete steps to correct the situation. Personally, I’m not letting the BEA off the hook but I am glad to hear they are taking steps to address the situation going forward.

Janet Yellen and FOMC Announcement Nonsense

Folks, the FOMC announcement today was a bunch of nonsense. I’m not going to waste your time breaking down the FOMC announcement because it was so stupid today.

federal-reserve-jokes-memeWhy am I so indignant to the FOMC announcement today? There was no mention of the negative effects of the strong U.S. dollar! If you had any doubt that Janet Yellen is blowing smoke up your a**, let that doubt be put to rest. That is so absurd that Janet Yellen did not mention the U.S. dollar that folks, it’s not even worth listening to.

Seriously folks, not talking about the U.S. dollar and how it has crashed the energy sector and put thousands of people out of work is so stupid, that now I’m questioning what the hell is going on at the Fed.

Look at this performance chart of the U.S. dollar and the energy sector (XLE):

Look at that! When has the U.S. dollar ever gone up +20% in a year? It’s crashed the energy sector which is down -20% over the last year. That’s a recession like crash coming from the energy sector. It’s not just crashing the energy sector. U.S. exports have plunged putting the manufacturing sector in a world of hurt. There has been over 100,000 oil sector layoffs. That’s just oil. If you include all energy sector related jobs, that number is easily over 150,000 jobs lost. Check out this article from the WSJ: Oil Layoffs Hit 100,000 and Counting

wall-street-truth-jokes-memeTake this sentence, “Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports”. Yes, let the bullsh*t flow throw you traders. A more truthful and accurate assessment would be something like, “We have tried buying trillions of dollars worth of assets and even the U.S. Treasury has tried increasing the money supply over the last 6 years and we still can’t get inflation up to our target because of the rising U.S. dollar. The rising U.S. dollar has crashed energy prices and taken thousands of irreplaceable good paying jobs with it. Worse, the rising U.S. dollar is crashing our export market and manufacturing is hurting as a result. GDP growth is contracting and the slowdown in the economy at the start of 2015 is not transitory as we had hoped. The stock market has mostly gone sideways for the last 8 months as growth on a global scale is grinding to a halt. Therefore, I am announcing no rate hike will take place in 2016 and, we will begin buying energy backed securities to stop the crash of the entire energy sector”.

federal-reserve-joke-memeRight? Come on. Whether you agree that the Fed starting QE5 and buying energy backed securities as actually helping the economy or not, at least it would be a truthful statement coming from the Fed. Instead, we get this bullsh*t where the U.S. dollar is not even mentioned! Not even once!

Where’s the mainstream financial media and the critical reporters doing their jobs? Their all trying to kiss the Fed’s a** so they get to sit at the front table during the Yellen press conference, rather than ask the tough, unpopular questions.

The rumor is that Democrats are begging Janet Yellen to not raise interest rates until after the election because they fear if she starts raising rates and the economy crashes, they won’t have a snow-ball in hell’s chance at keeping the White House.

Enough of the bullsh*t. Until Janet Yellen starts being more truthful about what’s actually going on in the economy, I’m not interested in wasting my time or yours analyzing the FOMC announcement.

Durable Goods Orders Flat But New Orders Plunge YOY

The Durable Goods Orders report came in at 3.4 percent. The consensus range was 0.6 percent to 6.4 percent. Excluding aircraft orders, new orders rose just 0.8 percent.

The headline Durable Goods Orders report was not good or bad, it was just BLAH. We basically have sideways action on the chart.

Durable Goods Orders

However, if you dig deeper into the report beyond the headline number, the new orders metric looks bad. New orders have actually fallen year over year.

New Orders

libertarian-joke-memeThe Durable Goods Orders report, despite what the mainstream financial media is hailing as an ok number, does not support the Federal Reserve’s transitory thesis in my opinion.

The reason stock traders track the Durable Goods report is that it shows how busy factories will be in the coming months as manufacturers work to fill orders. Durable goods orders tells traders what to expect from the manufacturing sector, a major component of the economy. This report tracks everything from computers and electrical machinery, to refrigerators and cars. If businesses spend more on capital equipment, they are likely experiencing solid growth in their business. If consumers are spending more on big ticket items, they are likely experiencing wage and revenue growth.

Democrats Target Jobs With Minimum Wage Hikes

One of the few bright spots in the U.S. economy has been in the lower paying service sector industry. Now, the push by Democrats for a minimum wage hike is a direct target at job creation in the service sector industry.

Please remember that this is not a subjective interpretation based on a political bias, but instead on sound economic analysis. In this article I will show you, from a mathematical and microeconomics perspective, what happens when minimum wages are artificially set higher by the government.

Labor Supply and Demand

Labor is charted on a supply and demand chart just like other market forces.


The wages paid are on the vertical axis, while the quantity of workers demanded is on the horizontal axis. Demand slopes downward (D), while supply slopes upward (S).

In a perfectly competitive labor market, equilibrium is established where the supply and demand curves meet.

Now look at what happens when the minimum wage is artificially set higher by the government.

Minimum Wage Hikes

What happens when minimum wage is raised

When wages are artificially set higher by the government in the form of minimum wage hikes, workers wages go up, but the quantity of workers demanded (D) goes down. In other words, a minimum wage hike raises the unemployment rate and puts more people out of work.

The supply (S) of workers goes up as the labor participation rate rises from people going back into the workforce in a desire to get that higher minimum wage job.

Rising minimum wage creates job shortage

Notice the box that is created from the rise in the minimum wage. This is a big problem as it represents an inefficiency in the free marketplace. This inefficiency manifests in the economy as a shortage of available jobs.

Jobs shortage created by minimum wage hikes

In other words, when the minimum wage is raised, a business will raise the price of its products, and reduce its total number of workers, in order to offset the increased labor costs.

Wages Can Only Rise On An Increase In Demand

The only way to increase worker wages AND the total number of jobs at the same time is if a business has more consumer demand for its products and services. This will shift the demand curve outward:

Wages should only rise as a result of increased demand

As consumer demand for a firm’s products and services increase, it shifts the demand curve outward so that wages will go up, while the demand for workers goes up, and a new market equilibrium is established.

Unions Impact On Wages and Jobs

The only way to increase worker wages and the total number of jobs at the same time, is if demand for a businesses products/services goes up. Some Democrats assert that the other way for wages to go up, beyond setting an increase in the minimum wage, is by employees becoming part of a union. That is not entirely true.

If a union exerts monopoly power in a market, say for grocers, wages will rise to W** in the chart below:

What happens when a union increases wages

Once again though, notice what happens to the quantity of labor, it falls to Q**. In other words, while the wages of those working go up, the number of people with jobs goes down. The difference between the supply of labor S (those wanting jobs), and the employer demand for that labor D (jobs available), is once again a labor shortage:

Unions cause labor shortage

The Law of Diminishing Returns

Raising the minimum wage is also a problem because of the law of diminishing returns. Basically this means that if the government raised the minimum wage from say $9 an hour to $15, if the worker produced more value, the company that had to pay the higher wage would not have a problem because the workers increased value would offset the increased cost. But that’s not what happens. A worker can only produce so much value in a particular job and so there is the law of diminishing marginal productivity.

The marginal revenue product, or MRP, is the increase in total revenue, resulting from the increase in labor revenue for that employee.

The marginal resource cost, or MRC, is the increase in total cost, resulting from the increase in labor cost for that employee. In a perfectly competitive market, MRC equals the wage rate.

A business, in order to maximize profits, will hire additional employees so long as each employee hired adds more to the firm’s total revenues than it does to total costs. In other words, there is the profit maximizing rule which states that it will be profitable for a firm to hire additional employees up to the point at which that additional employee’s MRP is equal to its MRC.

If the number of workers currently employed by a firm is such that the MRC of the last worker is less than the MRP, the firm can profit by hiring more workers. However, if the number of workers already hired is such that the MRC of the last worker exceeds the MRP, the firm is employing workers who are not paying their way, and it can thereby increase its profits by laying off some workers.

Here is an illustration of the profit maximizing rule. Suppose that the government sets the wage rate at $13.95. How many workers will the firm hire?

Profit Maximizing Rule

The firm will hire one worker because the first worker adds $14 to total revenue, and slightly less, $13.95 to total cost:

Profit Maximizing Rule at Wage Hikes

In other words, the MRP exceeds the MRC for the first worker, so it is profitable to hire that worker.

Now consider if the government had not raised the minimum wage to $13.95 but instead allowed the firm to continue to pay $9.95 an hour. How many workers will the firm hire?

Profit Maximizing and Free Market Wages

The firm will hire three workers.

I see a lot of people making the mistake of thinking that a minimum wage hike of only a few dollars per hour is no big deal in terms of job layoffs. As you can see from the law of diminishing returns, mathematically that is not the case. In terms of the hypothetical business above, a difference of just $4 per hour amounted to a difference of 1 available job versus 3 available jobs or a whopping 200% increase in available jobs due to the lower hourly wage.

Even a small increase in the minimum wage will have a huge negative impact on the total available jobs.

Because we are on the subject of labor and wages, I thought I would briefly discuss the impact that immigration has on wages.

Immigration Lowers Wages

Increased immigration puts a downward pressure on wages. Immigration shifts the supply curve outward and results in lower wages:

Immigration lowers wages

In other words, increased immigration leads to lower wages and an increase in the number of lower paying jobs.

New Home Sales Plunge, Surprise To The Downside

New home sales came in at 482K for the month of June. The consensus range was for 535K to 570K. That’s a BIG negative surprise.

Home construction builders are relying on multifamily construction to stay afloat. If Democrats get rent controls in place across the country, you can say goodbye to multifamily construction and we will see thousands of job layoffs across the home building sector.

New Home Sales

The chart looks much more bearish than it did a month ago with a lower high put in place. This chart does not support the Federal Reserve’s transitory thesis. The slowdown in the economy, according to the Federal Reserve, was suppose to primarily be something that just impacted the start of 2015. Then it turned into, well, give it more time. They said there’s some lingering effects of this transitory slowdown that might bleed a little bit into Q2. Today, we have a big negative surprise for the month of June in new home sales. Folks, that’s not just a little bleed over into Q2.

To review, stock traders track the New Home Sales report because its a measure of economic momentum. Each time the construction of a new home begins, there are more construction jobs, and income which will cycle back into the economy. Once the house is sold, it generates revenues for the home builder and the realtor. New home buyers often purchase refrigerators, washers, dryers, furniture, and so on. The economic “ripple effect” can be substantial.

Free Markets Need To Reward Those That Succeed NOT Punish

This blog and my YouTube channel hangs in the balance as I try to survive in this Democrat economy of higher taxation and living costs. The Obama Administration is not for free markets and rewarding those that succeed. Instead, they overtax and punish those who succeed.

Like Greece, most Democrats here believe the exact opposite, incompetently suggesting wealth be “spread around.” They seem to lack even a basic understanding of economics and that someone must create the wealth in the first place.

democrat-jokeThe next President of the United States must believe in people and strongly embrace the idea that no matter where someone is born, they deserve the same opportunity as anyone else to pursue happiness and attain their own version of success, based on hard work and determination.

The next President needs to believe in small government, at least that’s what the Founders thought. Federalism has been undermined. While Republicans are guilty of government expansion too, during the last 7 years, Democrats have gotten out of control and have grown government to soaring new heights.

Over the last 50 years, Democrats have chipped away at our constitutional republic by sucking power from individual states, and giving it to our huge centralized government in Washington. That’s how a nonpartisan idea like improving healthcare for all Americans morphed into the partisan beast known as Obamacare.

The Lesson From Greece

gun-control-jokeAccording to some reports, President Obama called the Greek Prime Minister to discuss the deteriorating situation. The Greek leader responded, “Are we talking ours or yours?” In one of his many “Do as I say, not as I do” moments, Obama lectured that Greece should curtail spending and reduce its debt.

What has happened to Greece is happening in the U.S. under Democrats and President Obama. Businesses are leaving. We have one of the highest corporate tax rates in the industrialized world; as a result, corporations are doing “inversions.” The way an inversion works is that an American company merges with a Swiss or Irish company and then they move their headquarters to that foreign country, often cutting their tax rate in half.

high-taxesSo many U.S. businesses were forced into doing inversions to lower their tax rate that Obama ordered the Treasury Department to penalize U.S. businesses that do inversions. A sweeping crackdown took place in September of 2014. That’s not a fix to the problem. Money goes to where it’s treated best. Business goes where it is treated best. The low tax countries get the revenues and the jobs. Until we get a new President that gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws.

In the U.S., the Federal debt is $18,630,380,376,000. This $18.6 trillion amount is the gross federal debt issued by the United States Department of the Treasury since 1790. It does not include state and local debt, and it doesn’t include the so-called unfunded liabilities of entitlement programs like Social Security and Medicare. At the end of FY 2015 the total government debt in the United States, including federal, state, and local, is expected to be $21.6 trillion.

Democrats Target Home Builders With Rent Control

Democrats are pushing for expanded rent controls across the country. In every major state, rent control measures are being pushed by Democrats as rents rise.

Home builders are being hurt by the new single family home sales market so they are increasingly building multifamily apartments to keep construction going and workers employed.

rent-controlsThe demand for apartments has been rising for years as builders move to meet that demand. Democrats want to crash one of the few expanding markets, multifamily construction, with rent controls. Rent controls are a bad idea and they don’t work very well. They create inefficiencies in the market place and result in a loss of construction jobs. That is not an opinion but a fact. I will explain the mathematics and economics behind rent controls and what they actually do to the economy.

Keep in mind that almost any time the government tries to raise taxes, raise the minimum wage, and attempts to redistribute income from the rich to the poor through mechanisms like rent control, food stamps, Obamacare, and Medicare, those controls tend to interfere with the efficiency of the free market and result in a loss of jobs.

Let’s begin with a supply and demand chart for rent control:

suppy and demand

Price is on the vertical axis and quantity on the horizontal axis. The demand curve slopes downward and is labeled D. The supply curve slopes upward and is labeled S.

The Law of Demand (D) For Apartments

The lower the price of the apartment, ceteris paribus (Latin phrase that means “holding other things constant”), the more consumer demand for that apartment.

The higher the price of the apartment, ceteris paribus, the less consumer demand for that apartment.

The Law of Supply (S) For Apartments

The lower the price of an apartment, ceteris paribus, the fewer multifamily apartment complexes construction companies will build.

The higher the price of an apartment, ceteris paribus, the more multifamily apartment complexes construction companies will build.

Where the supply and demand curve cross is where we find market equilibrium between supply and demand. This is the most efficient balance between supply and demand that is achieved by a relatively free marketplace.

What Rent Control Does To The Supply and Demand Curve

Knowing the law of demand, what do you think will happen when the price of apartments is lowered? The demand will go up. Here is the demand side of the equation on the supply and demand chart:


Notice that the demand curve slopes downward and so you can see that the quantity demanded goes up (D) when price (P) is lowered.

Everybody follows what I’m saying up to this point fairly well. Demand is almost an intuitive concept as everybody understands that when price goes up, demand goes down and vice versa. Where a lot of people get lost is when thinking about the supply side of the equation. That law of supply dictates that when price goes down, so does supply. In other words there’s less profit to be made building apartments when rent controls are in place. Banks give loans based on the number of units and what the market price is for rents. Brokers value a multifamily property by the number of units and what the market rent for those units are. Suppliers, or in this case multifamily construction companies, will not build as many multifamily apartments if they can’t make enough money on it. Here is the supply side of the equation on the supply and demand chart:

suppy demand

The chart above shows a big problem. There is a huge gap between demand (D) and supply (S). The demand of lower priced apartments far exceeds the supply as a result of rent controls. This is why you have 4+ year waiting lists for Housing Authority and Section 8 multifamily apartments. It is an inefficient marketplace where consumers are frustrated because of the lack of supply of available low income apartments.

Market equilibrium, freedom, and capitalism go hand in hand as evidenced by the supply and demand curve. When businesses and consumers are allowed to freely engage in transactions, a market equilibrium is established that is the most efficient outcome. Under socialism and communism where the government interferes with the freedom of the market place by setting artificial price controls, it creates gaps between supply and demand and makes an economy inefficient. This is the biggest reason why America is #1 in terms of both supply and demand side economics and that a communist country like China will never really pose a threat to our economic superiority because of the huge inefficiencies in their economy.

Notice the box that was formed in the chart above by the difference between the quantity demanded and the quantity supplied. This box represents a market shortage of rental units.

suppy demand

rent-controlNormally during a shortage, prices go up, supply goes up, and a new equilibrium is established. In a rent control shortage, rents are not allowed to rise freely and so the shortage stays. This shortage also represents a loss of jobs in the multifamily construction industry as less multifamily apartments are being built.

By Democrats pushing rent controls in every major state across the U.S., they are targeting the building of multifamily apartments, one of the few bright spots left in the construction industry. At a time when good paying jobs are scarce, that’s a really bad thing to do.

Take, for example, Standard Pacific (SPF), which builds both multifamily and single-family homes. With higher taxes and environmental regulation brought on by Democrats, and a weak single family home building sector, SPF has barely been able to tread water since May of 2013. This explains the sideways pattern on the chart in SPF where the stock has gone no where for more than 2 years in a Democrat proclaimed “economic recovery”:


What do you think will happen to Standard Pacific stock if widespread rent controls are enacted across the U.S.? According to supply and demand economics, Standard Pacific will have their margins squeezed and they will build less multifamily apartments and will layoff lots of workers as a result.

Existing Home Sales Highest Since Bubble Days

Existing home sales came in strong in June at 5.49 million which is the highest since the bubble days of February 2007 according to Econoday. The median price, up 3.3 percent in the month to $236,400, which is an all-time high.

NAR chief economist Yun said, “Buyers have come back in force, leading to the strongest past two months in sales since early 2007. This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that’s giving more households the financial wherewithal and incentive to buy.”


Why did the S&P 500 get only a small bump on a crazy bullish existing home sales report? One reason could be that existing home sales are being fueled by an increasing number of foreigner purchases. The percentage of REALTOR® respondents who reported working with international clients over the last year has increased by 8 percent over the previous year. That’s just the realtor respondents that reported. I suspect the number is much higher. Approximately 210,000 houses are estimated to have been sold to foreign buyers over the last year, or approximately 5 percent of total existing home sales. The total foreign sales dollar volume is estimated at $105 billion, approximately 9 percent of total existing home sales dollar volume. Canada, China, Mexico, India, and the United Kingdom lead as the top 5 foreign buyers of existing homes in the US.

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