Saturday, August 19, 2017
August 2nd was a rather auspicious day this year. That’s because what is known as Earth Overshoot Day (EOD) fell on the second day of August — the earliest it has ever arrived.
What is Earth Overshoot Day, you may be asking?
It is the date on which humanity’s resource consumption for the year exceeds earth’s capacity to regenerate those resources that year. The problem with EOD arriving on August 2nd is that there are still five months left in the year. From this point forward, humanity is stealing from its own future.
In a normal, healthy world, humanity would not use up all its available resources until Dec. 31. In fact, until the past few decades, humanity didn’t even come close to depleting all of the earth’s renewable resources on an annual basis. In 1963, humanity used just 78 percent of the earth's biocapacity.
Yet, Earth Overshoot Day has been arriving earlier than the previous year on a rather steady basis since the early 1970s. Look at where it fell at the start of recent decades:
1971 - December 21
1980 - November 4
1990 - December 7
2000 - November 1
2010 - August 21
Notice the trend? The arrival of EOD has really accelerated over the past two decades. As recently as 1975, EOD fell in December. The last time it fell in November was 1985. At the current pace, it will arrive in July in 2019.
Aside from representing the day when the human population overshoots its environment, economically speaking, EOD also represents the day on which humanity begins its ecological deficit spending.
This earth contains finite resources, some of which are renewable if given adequate time to replenish. Therein lies the problem; humanity is using these resources far faster than they can be restored annually.
Obviously, this has limits, which are recognizable in the form of shrinking forests, topsoil erosion, species loss, fisheries collapse, diminishing fresh-water supplies and higher commodity prices.
Earth Overshoot Day is calculated by Global Footprint Network, which calls itself, “An international think tank that coordinates research, develops methodological standards and provides decision-makers with a menu of tools to help the human economy operate within Earth’s ecological limits."
According to Global Footprint Network’s calculations, our demand for renewable ecological resources and the services they provide is now equivalent to that of more than 1.5 earths. The data shows us on track to require the resources of two planets well before mid-2000-century.
As you may know, there are no additional earths from which to extract precious resources. That poses some rather obvious problems, the kind that don’t have easy answers.
The obvious solution is to change our behavior, but humanity has never been very good at that. However, reality doesn’t negotiate. It’s terms are firm and irreconcilable.
Environmental groups, such as Global Footprint Network and the World Wildlife Foundation, recommend some fairly simple remedies, such as eating more vegetarian meals and cutting food waste. Yet, those are tough sells in America, where people believe in “American exceptionalism” and don't like being told what to do.
Big problems usually don’t have easy solutions. The above suggestions are fairly straight forward and achievable. However, getting big industries to stop deforestation and overfishing, for example, will be much more challenging.
The earth needs more trees, not less. Without a massive tree-planting campaign, the forces of climate change will evolve more quickly and be more devastating.
Every single minute, an area of forest the size of fifty soccer fields is cut down. Some 129 million hectares of forest — an area almost equivalent in size to South Africa — have been lost since 1990, according to the United Nations' Food and Agriculture Organization (FAO).
Overfishing has left vulnerable the millions upon millions of people around the world who are dependent on the sea for food and income. Nearly 90 percent of global fish stocks are either fully fished or overfished, based on an analysis from the UN’s FAO.
Ocean species are not the only animals vanishing from the earth at a dangerously rapid pace.
A report from World Wildlife Fund found that more than half the globe's vertebrates — mammals, birds, reptiles, amphibians and fish — were wiped out in a mere four-decade span. Specifically, these populations declined by 58 percent between 1970 and 2012.
The world’s topsoil, which is vital to growing crops, is in a perilous state; about a third of it is already degraded and the decline is projected to continue. Generating three centimeters of top soil takes 1,000 years, and if current rates of degradation continue all of the world’s top soil could be gone within 60 years, according to a senior UN official.
The global population is presently 7.5 billion. The United Nations predicts it will increase to 10 billion by 2050.
This means, by that time, the world’s farmers, ranchers, and fishers must find a way to produce more food than they have in all of human history. That will prove daunting since farmland is decreasing instead of increasing.
In 1960, there were 1.1 acres of arable farmland per capita globally, according to data from the UN. By 2000 that had fallen to 0.6 acre. Clearly, productive farm land and the human population are moving in the opposite directions.
Fresh water scarcity afflicts much of the world. Only about half of the world’s population has a connection to a piped-water supply in the home, whereas 30 percent rely on wells or local village pipes, and about 20 percent have no access at all to clean water.
Though 71 percent of the earth’s surface is covered by water, only 3% of all the water is freshwater, meaning it is safe for drinking. However, most of this is unavailable for human use. Roughly three-quarters of all freshwater is part of the frozen, and largely uninhabited, ice caps and glaciers. What remains for our use is about 1 percent of the total.
While a concerted, global effort is needed to stop and ultimately reverse the exhaustion of the earth’s resources, much of the developed world remains woefully unaware of the crises that are currently unfolding.
People who live in places where massive deforestation has occurred and continues, such as the Amazon, are well aware the emergency. People in fishing communities around the world come face to face with empty nets on a daily basis. The half of the global population without a piped water supply in their homes likely views clean, drinking water as the vital, precious resource that it is, while the other half likely takes it for granted.
Governments around the world need to act unilaterally, and quickly, to solve these problems or the entire planet will be facing multiple, crushing resource shortages all at once, just a few decades from now.
For much of the world, these issues are already at full-blown crisis levels right at this very moment.
Friday, August 11, 2017
U.S. housing inventory hit a record low this year and the trend in tightness shows no sign of abating.
The inventory of homes for sale was down more than 11 percent in June, year over year, according to Zillow, with steeper drops in big markets like San Francisco (minus 26 percent), Minneapolis-St. Paul (down 30 percent), Washington, D.C. (down 20 percent) and Seattle (minus 24 percent).
Remarkably, housing inventory experienced a year-over-year decline for the 104th consecutive month, dating back to October 2008, according to RE/MAX.
Homebuilders haven’t picked up the slack by constructing more homes. Though housing starts have increased dramatically from the crash-era bottom, they’re still below average. In short, building hasn’t caught up with demand yet, which has kept supply painfully low.
“There are about as many homes for sale now as there were in 1994, except there are about 63 million more people in this country now than there were then,” reports Svenja Gudell, chief economist at Zillow.
That has driven home prices to record highs. The June 2017 Median Sales Price of $245,000 was the highest in the history of the RE/MAX National Housing report.
Unless supply rises quickly and dramatically, or unless demand suddenly falls due to lack of affordability, expect the housing crunch to continue.
Though median household income rose to $56,516 in 2015 (the latest data available), according to the U.S. Census Bureau, it remains 1.6 percent lower than in 2000, when it hit $57,790, and 2.4 percent below the 1999 peak at $57,909.
However, homes were much less expensive back then. The median U.S. home value was $119,600 in 2000, according to the U.S. Census Bureau. Because homes are far less affordable today, relative to incomes, it will lead to more defaults and foreclosures in the next, inevitable, recession.
This isn’t the only evidence that Americans are living beyond their means.
Credit-card debt in the U.S. rose again in June, surpassing the peak set just before the 2008 financial crisis.
Outstanding revolving credit, which includes credit-card debt, rose to $1.02 trillion in June, according to a monthly report from the Federal Reserve.
This has consequences; defaults are once again on the rise. The New York Federal Reserve observed a 7.5 percent rise in the share of credit-card balances that were seriously delinquent, or at least 90 days past due, in the first quarter.
Mortgage debt ($14.4 trillion), credit card debt ($1 trillion), student loan debt ($1.4 trillion) and auto debt ($1.2 trillion) have all piled up to record levels. Consequently, U.S. household debt surpassed its pre-crisis peak in the first quarter. Total household debt increased to $12.73 trillion, surpassing the previous record level seen in 2008.
If you’re looking for a ray of light in this story, it might be that household income is now higher than in 2008. However, it still remains lower than in 1999 and 2000. That’s not good news.
Another positive view: in the fourth quarter of 2007, when many of us realized that the wheels were coming off the wagon, Americans were devoting 13 percent of their disposable personal income to household debt service. By the first quarter of 2017, that percentage was 10 percent.
Maybe that means that everything ok and Americans have it all under control.
But there’s no escaping the fact that wages have been very sluggish, rising just 2.5 percent over the past year. Wages typically grow by 3.5 percent to 4 percent when the unemployment rate is this low
However, inflation has also been sluggish, remaining below the Federal Reserve’s 2 percent target for five years. In fact, the Consumer Price Index rose just 1.7 percent, year-over-year, in July.
So, though wages have remained weak, inflation has remained even weaker.
Yet, the CPI is misleading. Things such as college tuition, prescription drugs and home prices are all far above the overall inflation rate. For example:
* Tuition at four-year public colleges has risen 225 percent over the past 20 years, according to College Board data. Student loan debt has now risen to $1.4 trillion.
* From about mid-2015 to mid-2016, prescription drug costs jumped by nearly 10 percent. Furthermore, according to an AARP study, the price for an AARP-selected basket of widely used prescription drugs rose from $4,140 in 2005 to $11,341 in 2013, an average annual increase of 13.4 percent and a total jump of 174 percent.
* The median U.S. home value rose 96 percent from 2000 - 2016, according to the U.S. Census Bureau, meaning it roughly doubled over 17 years. That’s an average annual increase of 4.1 percent, well above the inflation rate.
Though consumers may have seen modest increases for consumer goods, such as clothing and footwear, the bulk of our money is spent on much more expensive items, such as housing, tuition, prescription drugs, health insurance and healthcare. None of those things have undergone modest price increases.
The heavily inflated costs of these components are creating enormous and unhealthy debt levels. Record-high debts should be seen as a canary in the coal mine.
The last time debt levels were this high, it didn’t end well. In fact, we’re still grappling with the aftermath a decade later.
Tuesday, August 08, 2017
In the first quarter, real GDP increased 1.2 percent, according to the Bureau of Economic Analysis. Yet, that weak performance didn’t stop all the major US stock indexes from closing at or near record highs.
Though the economy strengthened in the second quarter, expanding at a 2.6 percent clip, it was still tepid by historical standards. However, the Dow Jones has just experienced a streak of nine record closes. Over the course of 2017, the Dow has posted 35 record finishes.
Records have become commonplace for the Dow in recent years. In fact, the Dow has reached a new high, on average, once every seven days since fully recovering from the Great Recession in March 2013. In all, the Dow has achieved a new record 154 times in that span.
The S&P 500 also rose to a new record this week. The index has advanced nearly 11 percent so far in 2017. The NASDAQ and Russell 2000 indexes also closed at record highs this summer.
So far this year, the US economy has expanded just 1.9 percent, yet the stock markets are going nuts. It’s all come on the heels of a weak 1.6 percent expansion for all of 2016.
With that in mind, ask yourself this: Why are all of the stock markets at, or near, all-time highs?
This is the definition of “irrational exuberance,” as former Fed Chairman Alan Greenspan once described it.
The stock market is supposed to be forward looking. Yet, that sort of wisdom has become a thing of the past. Federal Reserve officials now expect GDP to remain around 2 percent through 2019. The markets are somehow unconcerned with this projection.
While most members of the 30-stock Dow make a big chunk of their money overseas, they are a pittance compared to the thousands of U.S. companies who do not.
The truth is, the stock market is not an accurate measure of the health and strength of the economy. The markets are simply a bet on the future performances of a select group of companies listed on a few stock exchanges.
Most American companies aren't even publicly traded. In fact, less than 1 percent of the 27 million businesses in the U.S. are publicly traded on the major exchanges.
Additionally, the number of public companies in the U.S. decreased by nearly 50 percent from 1996 to 2014, according to the National Bureau of Economic Research.
So, in reality, Wall St. is not a true reflection of how the average American worker, or the average family, is faring. In fact, nearly half of us don't own any stocks at all.
According to Gallup, 52 percent of U.S. adults owned stock in 2016. Since Gallup started measuring this in 1998, that's only the second time ownership has been this low. These figures include ownership of an individual stock, a stock mutual fund or a self-directed 401(k) or IRA.
Furthermore, the gains from this surging stock market have been flowing mainly to richer Americans. Roughly 80 percent of stocks are held by the richest 10 percent of households.
Clearly, the ballooning stock market is not a reflection of the financial well-being of the vast majority of Americans. Half of them aren't even investors. The markets are simply Wall Street’s betting games.
The reason for the markets' meteoric rise has been the Federal Reserve’s vast financial engineering.
During the 2008 financial crisis, the Fed cut its key interest rate to zero. After determining that this radical move wasn’t sufficient, it took the dramatic step of initiating quantitative easing, or QE.
Following three successive rounds of these Treasury and mortgage bond purchases with magically conjured money, the Federal Reserve’s balance sheet ballooned to $4.5 trillion. That amounted to a fourfold increase from late 2008 to late 2014. Much of that freshly-created money flooded into the stock markets. The money had to go somewhere.
Most people can’t live with, or on, the measly interest rates from savings accounts or certificates of deposit, which seem downright antiquated at this point.
Treasuries offer little help. Check out these yields (as of today):
1-year: 1.22 percent
2-year: 1.36 percent
5-year: 1.83 percent
10-year: 2.28 percent
30-year: 2.86 percent
Remember that the S&P has advanced nearly 11 percent so far just this year. It’s little wonder that investors are willing to roll the dice and hope that the good times just keep on rolling.
Of course, bets don’t always pan out. The markets always correct and they sometimes crash. Right now, there are plenty of reasons to worry, or at least be deeply concerned.
Michael Lebowitz of 720Global assembled “22 Troublesome Facts” behind his reluctance to follow the bullish stock market herd. Here’s a small sampling:
• The S&P 500 cyclically adjusted price-to-earnings (CAPE) valuation has only been higher on one occasion, in the late 1990s, during the Tech Bubble. It is currently on par with levels preceding the Great Depression.
• Total domestic corporate profits (w/o IVA/CCAdj) have grown at an annualized rate of just .097% over the last five years. Prior to this period and since 2000, five-year annualized profit growth was 7.95% (note: period included two recessions).
• Over the last 10 years, S&P 500 corporations have returned more money to shareholders via share buybacks and dividends than they have earned.
• At $8.6 trillion, corporate debt levels are 30% higher today than at their prior peak in September 2008.
• At 45.3%, the ratio of corporate debt to GDP is at historical highs, having recently surpassed levels preceding the last two recessions.
John Mauldin summed it all up this way:
"So, US corporations are simultaneously more indebted, less profitable, and more highly valued than they have been in a long time. Furthermore, they are intentionally making themselves more leveraged by distributing cash as dividends and buying back shares instead of saving or investing that cash. Yet investors cannot buy their shares fast enough. Maybe this will end well… but it’s hard to imagine how."
As I have long said, this will end in tears. History tells us so. What goes up must come down. Nothing grows in perpetuity.
Millions of investors will be wiped out when this market has its eventual collision with reality. Many think they can time the market, but no one has a crystal ball. When markets tumble, investors by the millions sell in a panic. The trouble is, for every seller, there must be a buyer. When everyone is trying to exit the market at the same time, there won’t be enough buyers. It will turn into a bloodbath.
The U.S. has entered its ninth full year of expansion — making it the third longest since the 1850s — and that creates reason for concern.
Throughout U.S. history, the gap between one recession’s end and the next one’s beginning has averaged just under five years. In other words, this expansion has gotten really long in the tooth, which is a very uncomfortable reality.
Whether it’s the next, inevitable recession that sparks a stock market meltdown (remember recessions often begin before they are officially recognized) or if it's a market collapse that ignites the next recession doesn’t really matter.
The outcome will be the same, and it will be brutal.