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Weekly Commentary: Framework for Monitoring Financial Stability

Weekly Commentary: Framework for Monitoring Financial Stability

Upon the public release of Jerome Powell’s Wednesday speech came the Bloomberg headline: “Powell: No Preset Policy Path, Rates ‘Just Below’ Neutral Range.” When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell’s prepared comments: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth.” When he read his speech, he used “range,” as opposed to “broad range” of estimates.
Equities responded to the Chairman’s seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, “We may go past neutral, but we’re a long way from neutral at this point, probably,” back on the third of October. Powell’s choice of language was viewed consistent with the ‘much closer’ to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday’s speech: “Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC.”

The “neutral rate” framework is problematic. Back in early October, the Fed was almost three years into its “tightening” cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel.
…click on the above link to read the rest of the article…

Competing Mortgage Headlines: Rates Barely Move vs Rates Surge Lower on Powell

Freddie Mac says “mortgage rates barely move” but Mortgage News Daily says “rates surge lower”

Mortgage News Daily and Freddie Mac offer conflicting reports on the bond market reaction Jerome Powell’s speech yesterday.

Mortgage News Daily says Mortgage Rates Surge Lower

Mortgage rates surged lower today, falling at the fastest single-day pace in more than a year. In order to see the average lender offer lower rates, you’d need to go back to October 2nd at least. For many lenders, it would be a few weeks before that. Granted, this merely restores rates to what had been 7-year highs at the time, but you know what they say about journeys of 1000 steps and what not…

Much of the improvement was driven by an ongoing reaction to a speech by Fed Chair Powell from yesterday.

Surge Defined

A surge is 9 basis points.

Freddie Mac says rates fell 13 basis points. But note the dates.

Freddie Mac posts mortgage data weekly, on Thursdays. Thus, the data is stale. After that table was posted Freddie Mac offered a different opinion.

Mortgage Rates Barely Move

Freddie Mac says Mortgage Rates Barely Move.

November 29, 2018

Mortgage rates stabilized the last couple of months as interest rate sensitive sectors such as new auto and home sales softened the outlook for the economy. Homebuyers pounced on the stability in rates as purchase mortgage applications increased, which indicates that despite higher mortgage rates this year there are buyers on the fence waiting for the right time to buy.

Ignore that galling bit of propaganda about homebuyers pouncing on rate stability as if buyers are coming back. They aren’t. Let’s step back and put this alleged surge into perspective.

Zero Reaction

…click on the above link to read the rest of the article…

This Is How the “Everything Bubble” Will End

This Is How the “Everything Bubble” Will End

I think there’s a very high chance of a stock market crash of historic proportions before the end of Trump’s first term.

That’s because the Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to pop “the everything bubble.”

I’ll explain how this could all play out in a moment. But first, you need to know how the Fed creates the boom-bust cycle…

To start, the Fed encourages malinvestment by suppressing interest rates lower than their natural levels. This leads companies to invest in plants, equipment, and other capital assets that only appear profitable because borrowing money is cheap.

This, in turn, leads to misallocated capital – and eventually, economic loss when interest rates rise, making previously economic investments uneconomic.

Think of this dynamic like a variable rate mortgage. Artificially low interest rates encourage individual home buyers to take out mortgages. If interest rates stay low, they can make the payments and maintain the illusion of solvency.

But once interest rates rise, the mortgage interest payments adjust higher, making them less and less affordable until, eventually, the borrower defaults.

In short, bubbles are inflated when easy money from low interest rates floods into a certain asset.

Rate hikes do the opposite. They suck money out of the economy and pop the bubbles created from low rates.

It Almost Always Ends in a Crisis

Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets.

Specifically, 16 of the last 19 times the Fed started a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time.

You can see some of the more prominent examples in the chart below.

…click on the above link to read the rest of the article…

The Federal Punch Bowl Removal Agency

The Federal Punch Bowl Removal Agency

US Money Supply and Credit Growth Continue to Slow Down

Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.

Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.

We say this for two reasons: for one thing, the Fed is reactive and when it moves   from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.

In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).

Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October.  Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).

…click on the above link to read the rest of the article…

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

Don’t Get Distracted By The Trump/Fed Soap Opera – The Crash Will Continue

At the beginning of 2018 I wrote extensively on what was likely to happen under the administration of Jerome Powell, the new Federal Reserve Chairman. In my article ‘New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018‘, published in February, I predicted that the Fed would continue interest rate increases and balance sheet cuts throughout the year and they would knowingly initiate a crash in equities.

To be clear, this was not a very popular sentiment at the time, just as it wasn’t popular when I predicted in 2015 that the Fed would launch interest rate hikes instead of going to negative rates in order to start a catalyst for economic crisis. The problem some people have with this concept is that they just can’t fathom that the central bank would deliberately crash the system. They desperately cling to the notion that the Fed and other central banks want to keep the machine rolling forward at any cost. This is simply not true.

The claim is that the banking elites are “required” to keep the system propped up in a state of reanimation because they are reliant on the system to provide capital and thus “influence.” The people that assert this argument don’t seem to understand how central banks operate.

As most liberty activists should know by now, central banks are essentially a legally protected counterfeiting scheme. Using fractional reserve banking at a ratio that is secret, central banks create their own capital from thin air, and they can infuse capital into international banks at will when it suits their purposes. There is no “profit motive” for the banking syndicate.

…click on the above link to read the rest of the article…

The Fed Is Tightening More Than It Realizes

The Fed Is Tightening More Than It Realizes

effects of fed balance sheet reduction

Before the 2008 collapse of Lehman Brothers, the Fed’s balance sheet stood at $925 billion—mostly U.S. Treasury securities. After 59 months of asset purchases to push down longer-term interest rates, it had ballooned to a peak of $4.5 trillion, including nearly $1.8 trillion in mortgage securities, in 2014.

In October of 2017, the Fed at last began a slow slimming-down of its balance sheet, allowing a growing amount of maturing securities to roll off monthly without reinvesting the proceeds. In former Fed chair Janet Yellen’s words, the central bank did “not have any experience in calibrating the pace and composition of asset redemptions and sales to actual prospective economic conditions.” She therefore stressed that the Fed saw its balance-sheet reduction primarily as a technical exercise separate from the pursuit of its monetary policy goals—in particular, pushing inflation back up to 2%. The Fed’s main tool for tightening monetary policy in a recovering economy would, therefore, she explained, be raising short-term market interest rates by paying banks greater interest on reserves (IOR). Since December 2015, the Fed has raised the rate on IOR by 195 basis points (1.95%), which has pushed up its short-term benchmark rate—the effective federal funds rate—in tandem.

By historical standards, the Fed’s rate hikes have been cautious. Even with inflation on target and unemployment at historic lows, the Fed has been raising short rates more gradually than in any tightening period going back to the 1950s.

We believe, however, that rate hikes understate the degree of tightening the Fed has imposed over the past year. The reason is that the Fed appears to be underestimating the impact of its balance-sheet reduction. Here is why.

…click on the above link to read the rest of the article…

Bank Of Canada To Start Buying Mortgage Bonds As Canadian Housing Market Cools

Ten years ago this week, the Federal Reserve announced it would start buying agency MBS. Asset purchases are now arguably a  standard non-standard monetary policy tool, as all three major central banks have since embarked in some form of asset purchases, and are currently in different stages of implementation.

And on Friday, the Bank of Canada became the latest to join the parade, when it announced for the first time plans to buy government-backed mortgage bonds in an attempt to boost its balance sheet and arguably, to stabilize Canada’s flagging housing market.

The move, part of a decision to include government-guaranteed debt issued by federal Crown corporations, will allow Canada’s central bank to offset continued growth in bank notes, the central bank said in an statement Friday. It will also give it flexibility to further reduce its participation at primary auctions of Canadian government bond “to help increase the tradeable float of those benchmark securities and hence support their secondary market liquidity.”

As part of this expansion, a “small portion” of its purchases will be Canada Mortgage Bonds, which are guaranteed by Canada Mortgage and Housing Corp.  Purchases of mortgage bonds will be conducted in the primary market starting later this year or early 2019, the central bank said. The key excerpt from Friday’s statement is blow:

As part of these changes the Bank plans to allocate a small portion of its balance sheet for acquiring federal government guaranteed securities by purchasing Canada Mortgage Bonds. These purchases will be conducted in the primary market, on a non-competitive basis, and are expected to commence in the latter part of 2018 or in the first half of 2019. The Bank will continue to adhere to its principles of neutrality, prudence and transparency and conduct its transactions in a manner that limits market distortions and minimizes impact on market prices.

…click on the above link to read the rest of the article…

How a Fragile Euro May Not Survive the Next Crisis

How a Fragile Euro May Not Survive the Next Crisis

euros2_0.PNG

A big US monetary inflation bang brought the euro into existence. Here’s a prediction: It’s death will occur in response to a different type of US monetary bang — the sudden emergence of a “deflationary interlude.” And this could come sooner than many expect.

The explanation of this sphynx-like puzzle starts with Paul Volcker’s abandonment of the road to sound money in 1985/6. The defining moment came when the then Fed Chief joined with President Reagan’s new Treasury Secretary, James Baker, in a campaign to devalue the dollar. The so-called “Plaza Accord”  of 1985 launched the offensive.

Volcker, the once notorious devaluation warrior of the Nixon Administration (as its Treasury under-secretary), never changed his spots, seeing large US trade deficits as dangerous. The alternative diagnosis — that in the early mid-1980s these were a transitory counterpart to increased US economic dynamism and a resurgent global demand for a now apparently hard dollar — just did not register with this top official.

Hence the opportunity to restore sound money. But this comes very rarely in history — only in fact, where high inflation has induced general political revulsion (as for example after the Civil War) — was inflation snuffed out. In the European context this meant the end of the brief hard-Deutsche-mark (DM) era and the birth of the soft euro.

The run-up of the DM in 1985-7 against other European currencies, as provoked by the US re-launch of monetary inflation, tipped the balance of political power inside Germany in favor of the European Monetary Union (EMU) project. The big exporting companies, the backbone of the ruling Christian Democrat Union (CDU) under Chancellor Kohl, won the day. The hard DM, an evident threat to their profits, had to go. The monetarist regime in Germany tottered towards a final collapse.

…click on the above link to read the rest of the article…

Holiday Doings and Undoings


Somehow I doubt that this Christmas will win the Bing Crosby star of approval. Rather, we see the financial markets breaking under the strain of sustained institutionalized fraud, and the social fabric tearing from persistent systemic political dishonesty. It adds up to a nation that can’t navigate through reality, a nation too dependent on sure things, safe spaces, and happy outcomes. Every few decades a message comes from the Universe that faking it is not good enough.

The main message from the financials is that the global debt barge has run aground, and with it, the global economy. That mighty engine has been chugging along on promises-to-pay and now the faith that sustained those promises is dissolving. China, Euroland, and the USA can’t possibly meet their tangled obligations, and are running out of tricks for rigging, gaming, and jacking the bond markets, where all those promises are vested. It boils down to a whole lot of people not getting paid, one way or the other — and it’s really bad for business.

Our President has taken full credit for the bubblicious markets, of course, and will be Hooverized as they gurgle around the drain. Given his chimerical personality, he may try to put on an FDR mask — perhaps even sit in a wheelchair — and try a few grand-scale policy tricks to escape the vortex. But the net effect will surely be to make matters worse — for instance, if he can hector the Federal Reserve to buy every bond that isn’t nailed to some deadly derivative booby-trap. But then he’ll only succeed in crashing the dollar. Remember, there are two main ways you can go broke: You can run out of money; or you can have plenty of worthless money.

…click on the above link to read the rest of the article…

Rates on Their Way to 10-Year High After Hawkish Fed’s Recent Meeting

hawkish fed meeting

Round and round we go, where the hawkish Fed stops, nobody knows…

There was a bit of tension in the markets last week. This tension stemmed from a prediction that the federal funds rate would be well on its way to a decade high even if the Fed did nothing at their November meeting.

Well, that concern has been justified. In a statement issued after the meeting, the Fed kept their funds rate at 2 – 2.25%, the same range after their September meeting.

But nothing in their statement indicated changes in their plan for another rate hike in December and three more in 2019.

In fact, a CNBC article points to a quarter point increase in December. Assuming this happens, that would send the funds rate to its highest since 2008 (see chart below):

us fed funds rate

The primary credit rate remained steady at 2.75%, according to the Fed statement. That is, until December’s anticipated rate hike.

Another CNBC article published just before the meeting statement was released had a telling statement (emphasis ours):

In recent weeks, financial markets have been gripped by worry and volatility, and some analysts think that in its statement Thursday the Fed may take note of that anxiety as a potential risk to economic growth.

The “No comment” response by the Fed didn’t seem to acknowledge this anxiety.

But the market sure seems to be in a state of worry. Since October 3rd, the Dow Jones has lost 1,566 points as this is written (even after modest recovery).

And the Yield Curve Keeps Flattening

In July, the Fed stopped highlighting the yield curve as an indicator of an imminent recession. Instead, they swept it under the rug.

But according to Patti Domm, the market is still paying attention to it:

…click on the above link to read the rest of the article…

Coffee Sellers Are Not Fundamentally Different From Banks

With the 2007-8 financial crisis came a splendid alphabetical soup of central bank interventions to stimulate financial markets, lower interest rates, provide astonishing amounts of liquidity to banks and, allegedly, prevent another Great Depression. Likening the failure of big banks to falling elephants crushing even the smallest grass, former Fed Chairman Bernanke argued that consequences from bank failures would have caused much more havoc to the economy than the liquidity provision and bailouts his Fed oversaw.

Now, do banks really deserve special consideration in this sense? Let me illustrate by comparing the fates of two imaginary entrepreneurs:

Our first entrepreneur — let’s call him John — sees an opportunity in the beverage business. Specifically, he’s convinced that he can source high-quality Brazilian coffee beans, roast and serve impeccably aromatic coffee in downtown Manhattan. He draws up the business plan, estimates what he believes coffee-craving New Yorkers would be willing to pay for his coffee and assesses how many customers he could reasonably serve per day.

Setting his plan in action, he borrows some money from friends and family, rents an appropriate space, hires a construction team and interior designers to create the coffee-scented heaven he imagines, finds some competent baristas to staff it and finally opens his doors to hesitantly curious customers. From here, as in all entrepreneurial ventures, there are two paths John’s business may take:

  1. If customers love his coffee and willingly part with their dollars , enough so that John can cover costs as well as offer some return to his shareholders/creditors, we consider John’s venture successful. The profits describe the added value for consumers, regardless of whether you see John as a Misesian uncertainty-carrying and future-appreciating speculator or a Kirznerian arbitrageur, alert to discrepancies between prices of higher and lower-order goods.

…click on the above link to read the rest of the article…

Subprime Rises: Credit Card Delinquencies Blow Through Financial-Crisis Peak at the 4,705 Smaller US Banks

Subprime Rises: Credit Card Delinquencies Blow Through Financial-Crisis Peak at the 4,705 Smaller US Banks

So what’s going on here?

In the third quarter, the “delinquency rate” on credit-card loan balances at commercial banks other than the largest 100 banks – so the delinquency rate at the 4,705 smaller banks in the US – spiked to 6.2%. This exceeds the peak during the Financial Crisis for these banks (5.9%).

The credit-card “charge-off rate” at these banks, at 7.4% in the third quarter, has now been above 7% for five quarters in a row. During the peak of the Financial Crisis, the charge-off rate for these banks was above 7% four quarters, and not in a row, with a peak of 8.9%

These numbers that the Federal Reserve Board of Governors reportedMonday afternoon are like a cold shower in consumer land where debt levels are considered to be in good shape. But wait… it gets complicated.

The credit-card delinquency rate at the largest 100 commercial banks was 2.48% (not seasonally adjusted). These 100 banks, due to their sheer size, carry the lion’s share of credit card loans, and this caused the overall credit-card delinquency rate for all commercial banks combined to tick up to a still soothing 2.54%.

In other words, the overall banking system is not at risk, the megabanks are not at risk, and no bailouts are needed. But the most vulnerable consumers – we’ll get to why they may end up at smaller banks – are falling apart:

Credit card balances are deemed “delinquent” when they’re 30 days or more past due. Balances are removed from the delinquency basket when the customer cures the delinquency, or when the bank charges off the delinquent balance. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks in Q3, 6.2% of the outstanding credit card balances were delinquent.

…click on the above link to read the rest of the article…

Does the Market Need a Heimlich Maneuver?

Does the Market Need a Heimlich Maneuver?

For all we know, the panic selling is Wall Street’s way of forcing the Fed’s hand: stop with the rates increases already or Mr. Market expires.

Markets everywhere are gagging on something: they’re sagging, crashing, imploding, blowing up, dropping and generally exhibiting signs of distress.

Does the market need a Heimlich Maneuver? Is there some way to expel whatever’s choking the market?

So what’s choking the market? There are a number of possibilities: somewhere near the top of most observers’ lists are: rising interest rates, weakening credit growth in China, the slowing of China’s economy, trade wars, European uncertainties, currently centered around Italy but by no means restricted to Italy, Japan’s slowing economy, an over-supply of oil, the rolling over of global real estate markets, geopolitical tensions and various technical signals that suggest the 10-year Bull market in just about everything financial is ending.

That’s a lot to gag on. Take a quick glance at the effective Fed funds rate chart below: the Fed funds rate is up, up and away, accelerating to the moon. No wonder Mr. Market is holding his throat and making panicky motions of distress.

Which is worse–too much oil or a scarcity of oil? Depends on who you ask.Suppliers are panicking with prices pushing $50/barrel while consumers were anxious when prices pushed $80/barrel.

Who can perform the Heimlich Maneuver on Mr. Market? The European Central Bank has been “doing whatever it takes” for 6+ years, and the central banks of Japan and China have had the pedal to the metal of credit expansion / asset purchases for years.

…click on the above link to read the rest of the article…

Mad World

MAD WORLD

And I find it kinda funny, I find it kinda sad
The dreams in which I’m dying are the best I’ve ever had
I find it hard to tell you, I find it hard to take
When people run in circles it’s a very very
Mad world, mad world

Image result for the primal scream

The haunting Gary Jules version of the Tears for Fears’ Mad World speaks to me in these tumultuous mad times. It must speak to many others, as the music video has been viewed over 132 million times. The melancholy video is shot from the top of an urban school building in a decaying decrepit bleak neighborhood with school children creating various figures on the concrete pavement below. The camera pans slowly to Gary Jules singing on the rooftop and captures the concrete jungle of non-descript architecture, identical office towers, gray cookie cutter apartment complexes, and a world devoid of joy and vibrancy.

The song was influenced by Arthur Janov’s theories in his book The Primal Scream. The chorus above about his “dreams of dying were the best he ever had” is representative of letting go of this mad world and being free of the monotony and release from the insanity of this world. Our ego fools us into thinking the madness of this world is actually normal. Day after day we live lives of quiet desperation. Despite all evidence our world is spinning out of control and the madness of the crowds is visible in financial markets, housing markets, politics, social justice, and social media, the level of normalcy bias among the populace has reached astounding levels, as we desperately try to convince ourselves everything will be alright. But it won’t.

…click on the above link to read the rest of the article…

The Intolerable Scourge of Fake Capitalism

The Intolerable Scourge of Fake Capitalism

Investment Grade Junk

All is now bustle and hubbub in the late months of the year.  This goes for the stock market too. If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940.  This was nearly 100 points above the prior high of 2,847, which was notched on January 26th.  For a brief moment, it appeared the stock market had resumed its near decade long upward trend.

We actually did not believe in the validity of the September breakout attempt: the extremely large divergence between the broad market and the narrow big cap leadership was one of many signs that an internal breakdown in the stock market was well underway. It is probably legitimate to refer to the January 2018 high as the “orthodox” stock market peak – the point at which most stocks topped out. [PT]

Chartists witnessed the take out of the January high and affirmed all was clear for the S&P 500 to continue its ascent.  They called it a text book confirmation that the bull market was still intact.  Now, just two months later, a great breakdown may be transpiring.

Obviously, this certain fate will be revealed in good time.  Still, as we wait for confirmation, one very important fact is clear.  The Federal Reserve is currently executing the rug yank phase of its monetary policy.  As the Fed simultaneously raises the federal funds rate and reduces its balance sheet, credit markets are slipping and tripping all over themselves.

This week, for example, seven-year investment grade bonds issued by GE Capital International traded with a spread of 2.47 percent.  For perspective, this is equivalent to the spread of BB rated junk bonds.  In other words, the credit market doesn’t consider GE bonds to be investment grade, regardless of whether compromised credit rating agencies say they are.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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