See for Yourself, There’s No Real Economic Growth

Real Economic GrowthQuantitative easing was supposed to bring economic growth to the U.S. economy, but it is failing at its job. Just look at the chart below to see how badly things have turned out.

The chart shows the velocity of money in the U.S. economy. For the uninitiated, velocity is a measure of how many times each dollar must be used to buy specific goods and services. It’s a strong indicator of economic growth. When velocity increases, it suggests there’s heightened activity in the economy.

Clearly, the velocity of money shows the U.S. is going through severe tumult, and at the very best, economic growth has been questionable. It is continuously plunging and currently stands at historically low levels.

Velocity of M2 Money Stock(M2V)

The primary goal of quantitative easing was to print money to buy bad assets from the banks so they could start lending again, which should lead to increased consumer spending and, eventually, economic growth. But if quantitative easing was actually working, the velocity chart wouldn’t look like it’s taking a nosedive.

Don’t get me wrong; I don’t disagree that the first round of quantitative easing was needed. If not for QE1, the financial system would still be in great jeopardy. However, continuing it is not leading to any real economic growth.

But the quantitative easing goes on anyway. The Federal Reserve continues to print $85.0 billion a month. Even now that there’s speculation that it will start to taper off, you need to realize that it will still be printing more money—“taper” doesn’t mean stop; it means to slow the rate.

If there was any real economic growth in this nation, then we would see a jobs market recovery, but we haven’t. There are still almost 12 million Americans who are actively unemployed, and a significant number continue to leave the labor force.

Many Americans are working part-time because they can’t find any full-time jobs. As a matter of fact, part-time work looks like it’s becoming the new norm. Since the Great Recession ended, the number of people working temporary jobs has increased 50%—the most since the government started to record that statistic in 1990. (Source: USA Today, July 7, 2013.) That doesn’t look like economic growth to me.

But the jobs market is just one sector of the economy that shows how anemic economic growth has been in the U.S.—other statistics, like consumer spending, suggest the same.

Americans realize what really powers the U.S. economy. Continuously printing money only does one thing—it reduces the buying power of already struggling Americans. It certainly doesn’t bring economic growth.

The only place quantitative easing has really shown any positive effect is in the stock market. But I continue to be cautious, because when reality strikes the market—when investors realize the key stock indices are far from their real values—there will be panic, and they will slide.

Michael’s Personal Notes:

The mainstream media continues to report that the housing market in the U.S. economy is hot again, but I don’t share their optimism for a second. The fact of the matter is that the U.S. housing market may be headed toward a period of decline after just a few months of glory.

As I have mentioned before in these pages, the housing market will only improve when real home buyers buy homes. That hasn’t been happening in the U.S. economy. Real home buyers—those who plan to live in their homes—are shying away from the housing market.

For the week ended June 28, the number of completed mortgage applications in the U.S. economy plummeted 12% from a week earlier—the biggest drop in two years. The applications filed for refinancing a home decreased 64%—the lowest since May of 2011. (Source: Wall Street Journal, July 3, 2013.) Regular Americans just can’t afford to buy a house.

So who is actually buying homes in the U.S. economy and driving the housing market higher?

It’s the institutional investors who are buying homes, because this real estate provides them with a greater return than many other investments. It shouldn’t be too surprising—yields on stocks are low and the bond market is in a dangerous territory, edging toward a collapse.

Institutional investors have spent $17.0 billion on more than 100,000 homes in the housing market over the last two years, and they’ve become the biggest buyers in some parts of the U.S. economy. (Source: Bloomberg, July 8, 2013.)

Here’s how institutional investors work the housing market: Say they have $10.0 million. To keep things simple, if we assume they buy each home for $100,000 and rent it for $1,500 per month, they will receive 1.5% of their capital invested every month. Over a one-year period, they receive 18% of their capital. And if the housing market keeps going higher, they see capital appreciation as well. Those are high yields in any economy.

As we move forward, I just don’t see real home buyers rushing to the housing market. We might just see more of the same—institutional investors buying up residential homes in the U.S. economy.

Consider this: The Blackstone Group L.P. (NYSE/BX) has spent $5.0 billion to buy residential properties in the U.S. housing market. It has accumulated 30,000 homes. And if that’s not enough, the firm is starting a lending service that provides loans to other institutional investors who want to buy even more homes.

What the optimists in the mainstream media don’t realize is that this sort of thing can’t go on for very long. Institutional investors are constantly working to improve their bottom line, and since they currently believe the housing market is hot, they are buying houses and renting them out. But once the yields on investments like stocks and bonds start to edge higher, and rent drops due to an overabundance of rental homes, they will be in trouble—shareholders will ask for higher returns, and institutional investors might be forced to sell what homes they have accumulated.

Certainly, without real home buyers—who provide liquidity to the housing market—the home prices will edge lower once institutional investors begin to sell.

We need real home buyers to see real recovery. Until they make a comeback, I continue to question the housing market and the optimism surrounding it. Just look at homebuilder stocks; they are in decline—and that affirms my views on the housing market.