A weekend topic starting with the Associated Press. “Buy a home right now. Or if you own one already, refinance it. And if you have spare cash, buy some stocks. And if there’s a bubble in prices, don’t worry. It’ll get fixed later. Simply put, that’s the new message from the powerful Federal Reserve. The central bank just revised the goals of its monetary policy. So save the economy by borrowing at low-low-low rates and put your cash to work! Even if you have to pay record high prices for real estate or shares on Wall Street.”

“Now, rock-bottom interest rates seemingly forever may confuse some of you. I have answers to a few questions you might have. Q. Who made the Fed king? A. That ‘Hamilton’ musical? It was THAT guy.”

“You see, the Fed has a tough job as the arbiter of interest rates, setting the proper ‘lubricant’ for the economy. It’s a juggle of job creation vs. inflation. Q. What changed? A. The Fed claims it cannot find evidence that the cost of living is getting out of hand, based on its review of inflation rates. ‘A robust job market can be sustained without causing an outbreak of inflation,’ Fed Chairman Jerome Powell said in announcing the new policy Thursday.”

“I applaud the Fed for stepping into the leadership vacuum. But this extended ‘free money’ policy makes little sense. In fact, the Fed fears overall pricing power may be on a long-term decline and warns the economic illness called ‘deflation’ can be hard to cure. Obviously, the board members haven’t shopped much lately, especially for a home.”

“Yes, soaring real estate or surging stock prices might juice the economy. Of course, then … the Fed would see inflation! Q. You mean, the Fed creates a bubble … only to burst it? A. Let me have professor Jim Doti of Chapman University answer that. ‘The unprecedented monetary stimulus we’ve already had will in the long run — maybe one to two years — lead to higher interest — including mortgage — rates. That, in turn, will likely burst the bubble.’”

“Q. C’mon, Jon. The Fed’s smart people! A. In June 2005, as a housing bubble brewed, then-Fed Chairman Alan Greenspan said this to Congress: ‘There can be little doubt that exceptionally low-interest rates on 10-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.’ History can repeat itself.”

From Market Place. “The trucking industry can shed light on what consumers will be demanding in the future. And right now, trucking companies are providing an early warning signal about sectors of the economy that are weakening. There’s a grocery store and wholesaler called Sahadi’s in Brooklyn that imports and sells products from the Mediterranean and the Middle East. Pat Whelan runs logistics for Sahadi’s. Over the last couple months, he said he’s been getting a lot of unsolicited emails from trucking companies.”

“‘Just randomly, constantly, asking for cargo,’ Whelan said. ‘Do you have anything, do you have anything, do you have anything?’ One, I think, was like two or three times a day.’ Whelan said he’s never even heard of these trucking companies. Watching his inbox fill up with these emails, he said, is troubling. ‘When you see them constantly looking for cargo, that means they’re not getting their normal cargo,’ Whelan said. ‘So, what did they lose? What’s not shipping?’”

“One answer? Food supplies to restaurants. Mike Kucharski is the vice president of JKC Trucking, which operates over 200 refrigerated trucks from the Midwest to the West Coast. He said shipping foods to restaurants, hotels, and bars used to make up nearly half of his business. ‘We’re about 35% to 45% down,’ Kucharski said. ‘What these truckers are doing is they’re searching to haul anything.’”

“William Villalon, CEO of APL Logistics, an international supply chain company, said he sees signs that other sectors of the economy are recovering, too. For instance, auto parts are moving, a sign that people will be buying more vehicles. ‘You’re seeing a spike in forest products, because housing starts are up,’ Villalon said. ‘Because demand is up.’ But Villalon said the real question is whether that increase in demand is sustainable.”

From Outdoor Online. “Mike Bennett, the city manager of Fruita, Colorado, was camped out at 18 Road, a popular mountain-bike trailhead, when I called him on a Tuesday morning last spring. Over the howl of desert wind, he told me that the place was pretty much empty. ‘I’m staring around in the dispersed area, there’s no one here,’” he said.”

“In 2020, as COVID-19 cases climbed across the country, Fruita and other outdoor hot spots across the West began telling people not to come, shutting off the valve to tourism. While some businesses like bike shops stayed busy with locals, lodging revenue dropped by more than half, hitting the city’s bottom line. Fruita has grown to count on a booming outdoor recreation economy after shifting away from the bust of oil and gas (when oil- and gas-industry prices dove in 2014, the result of a supply glut and reduced demand, sales-tax revenue in Fruita dropped 90 percent)—and it isn’t alone in its dependence on tourism.”

“And now, because they’re so often dependent on a single-source seasonal economy, recreation towns across the country are suffering. Lamoille County, Vermont, home to ski areas Stratton and Stowe, saw unemployment rise to 25.4 percent in April after the ski season abruptly shut down the month before.”

“That same month, in Cheboygan County, Michigan, where boating and fishing drive business, unemployment was a dismal 41.2 percent, the highest in the country. Simultaneously, Grand County, Utah, home to Moab, a destination often held up as the model for a thriving recreation economy, was at 26.9 percent unemployment.”

“The narrative about the stability of tourism is proving to be false. ‘I think the analogue to the extractive economy is dead-on,’ says Megan Lawson, an economist who leads outdoor recreation, economic development, and demographics for Headwaters Economics. ‘I don’t want to be doomsday, but it is bleak right now, so we have to think about outdoor recreation as another economic specialization that’s vulnerable to boom-and-bust and think about long-term diversification.’”

“‘Tourism is boom-and-bust, and this is the first time it has been bust in those communities for a long time,’ says Jordan Smith, director of the Institute of Outdoor Recreation and Tourism at Utah State University. ‘So many wanted to move into recreation as fast as possible, they didn’t put as much thought into what that might mean long-term or the resilience of their economy when something like that happens.’”

From Stuff New Zealand. “Yet again, the housing market has outperformed all the understandably doomy and gloomy predictions of double-digit falls in the face of the worst economic crisis the world has seen since World War II. It seemed a sensible thing to say, given New Zealand’s housing market is the best performing in the western world in the last 30 years, relative to incomes, rents and after the effects of inflation are stripped out. Prices have quadrupled in real terms since 1980, and have tripled relative to incomes in the biggest cities.”

“Usually, when an asset market is ‘irrationally exuberant,’ as the former Federal Reserve Chairman Alan Greenspan termed it, there is some shift in supply or demand, or some external shock, that punctures the collective delusion and the market returns to equilibrium. Put simply, it’s too big to fail and everyone knows it, and can bet on this market being the first to get bailed out by the Government specifically, and voters more generally. Just as it did during the GFC, the Reserve Bank extended emergency credit lines to banks and slashed interest rates to support both the financial system and the economy.”

“The Government and the banks then agreed to a six-month residential mortgage deferral scheme in late March, which nearly 60,000 borrowers used to delay payments on $20.2 billion worth of mortgages. The Reserve Bank also immediately removed restrictions on high loan-to-value ratio lending and postponed plans to force banks to hold more capital. Then it pledged not to introduce negative interest rates before March 2021 because it would have been too painful for the banks.”

“This month it went further and said it was planning to print money and lend it to banks at negative interest rates, which would allow fixed mortgage rates to fall as low as 1.5 per cent early next year. The Reserve Bank’s own studies show that could pump another 20-30 per cent into house prices.”

From Post Media in Canada. “The chief executive officer of the Canada Mortgage and Housing Corporation has taken aim at a Vancouver realtor through Twitter, accusing him of offering bad advice and saying there should be a law against them. Realtor Owen Bigland posted about the return on deposit when you buy a house and it goes up in value, ending ‘Leverage is how true wealth is built. You need to get your money working.’”

“A few hours later, CMHC chief executive Evan Siddall responded, asking, ‘Sigh …. Because in your made-up world, house prices only go up. This kind of investment advice is like selling penny stocks because they’re cheap. You DO realize leverage works just as powerfully when prices go down … or were you not alive in 2008-2009?’”

“Siddall continued tweeting on Bigland’s comments: ‘A lesson in leverage for @owenbigland and the Trees Grow to the Sky crowd: including transaction costs and fees you pay him for bad advice, a (first-time homebuyer) with 5% down is underwater from day one. 85:1 leverage (that’s what’s available) results in asymmetric losses when prices fall,’ he wrote. ‘More self-serving advice from @owenbigland: he says a rented home isn’t a roof over your head … AND he seems prepared to guarantee that if you buy a house you’ll have a job for life … unemployment (e.g., as a result of a pandemic) will never force you to sell your house!!’”

“‘Including transaction costs and fees you pay him for bad advice, a #FTHB with 5% down is underwater from day one. 85:1 leverage (that’s what’s available) results in asymmetric losses when prices fall.— Evan Siddall ‘There should be laws against people like @owenbigland giving this kind of irresponsible financial advice.”

The Canadian Press. “New Bank of Canada Governor Tiff Macklem took to the international stage Thursday to call for central banks to better engage average citizens, saying that the pandemic has heightened the importance of communicating directly with an often skeptical and misinformed public. Speaking at the Jackson Hole Symposium, Mr. Macklem said that central banks need to shift their communications focus from ‘transparency with markets’ to ‘engagement with the public.’”

“‘This heightened interest is an opportunity, and it is critical that we do not squander it,’ Mr. Macklem said. ‘Let’s make this another legacy [of the crisis] – a deeper relationship between the central bank and its citizens.’”

The Wall Street Journal. “Jerome Powell’s Federal Reserve on Thursday released a long-awaited review of its policy framework, and it’s a mixed bag. On the upside, the central bank will no longer throttle the economy whenever ‘too many’ Americans have jobs. On the downside, the Fed may never raise interest rates again. The Fed was overdue to rethink how it pursues its dual mandate of full employment and price stability. Most obviously, the two goals no longer appear to conflict in the way monetary economists once assumed.”

“Having effectively admitted it no longer fully understands the relationship between economic growth, employment and inflation, the Fed still promises to decide in real time when its healthy above-target inflation has become dangerous. If the central bank gets this wrong, it could be forced to raise rates much higher, much faster than it would want.”

“The more glaring problem is the long list of questions the Fed didn’t review. The most important is Mr. Powell’s observation, offered without elaboration Thursday, that business cycles now end in destructive financial crises. The Fed thinks this is a regulatory problem to be solved with stricter capital rules and stress tests.”

“It might instead ask whether its preference over two decades for ‘looking through’ rising asset prices such as oil, gold and housing to keep rates low is contributing to financial instability instead of economic growth. Without exploring this question, the Fed has adopted a strategy with a built-in bias for low rates. The result is almost certain to be more financial manias, panics and crashes.”

“There are other unanswered questions. For instance, the Fed now assumes that the economy’s natural rate of growth, and thus its natural interest rate (‘r-star’ in the lingo) are in a natural decline for demographic or other reasons. Mr. Powell cites this as a justification for the Fed’s new symmetrical inflation target.”

“Well, what if there’s nothing natural about falling growth because the Fed’s policies are causing it? Research suggests sustained low rates can dent an economy’s growth potential by steering investment to unproductive uses, sustaining zombie companies, rewarding corporate financial engineering instead of capital expenditure, and contributing to asset booms and busts. It’s a shame the Fed has decided to double down on its low-rate, quantitative-easing bets before such a self-examination.”