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Here’s What I’m Worried About. And It’s Not a Recession

Here’s What I’m Worried About. And It’s Not a Recession

A rout in the hyper-inflated bond market can blow up everything at this point.

The locker room at my swim club has become the litmus test. When a complex topic, after years of being absent or ignored, suddenly crops up in conversation, and not just sporadically but all the time, it means that there is some kind of peaking going on. This suddenly hot topic now is a “coming recession.”

Just about everyone is talking about it. This means that fears of a recession or thoughts of a recession have now penetrated into the core of the previously recession-free zone: the swim-club locker room. It means that these recession fears might be peaking.

It makes sense. Recession-fear headlines are popping up everywhere. You cannot escape the drama. It’s not that there is a recession in the United States – far from it. It’s all about a coming recession.

And another term has penetrated into the musty locker room at my swim club, perhaps for the first time ever in its illustrious 100-plus-year history: “Inverted yield curve.”

People who didn’t care about it, who never cared about it, and who don’t know what it is, who don’t even really understand what a bond yield is, and who don’t really want to know what it is – in other words, perfectly sane people that have other things to worry about – are suddenly fretting about the inverted yield curve.

They’re fretting about it because everyone else is fretting about it. And every time the inverted yield curve comes up, recession talk is attached to it. But there’s a lot more to it than meets the eye.

In a survey released this week by the National Association of Realtors, 36% of active homebuyers – so people actively trying to buy a home – said they expect a recession starting next year, up from 30% a few months ago.

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

THE WOLF STREET REPORT: How Even “Low” Interest Rates Screw Up the Economy

THE WOLF STREET REPORT: How Even “Low” Interest Rates Screw Up the Economy

Interest rates don’t have to be negative to make a mess in the era of “Secular Stagnation.” (11 minutes)

THE WOLF STREET REPORT: The Giant Sucking Sound of Financial Repression

THE WOLF STREET REPORT: The Giant Sucking Sound of Financial Repression

In the US alone, it impacts nearly $40 trillion. And there are consequences for the real economy (10 minutes).

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What Collapsing Orders for Heavy Trucks – Down 71% from a Year Ago – Say about the U-Turn in Trucking

What Collapsing Orders for Heavy Trucks – Down 71% from a Year Ago – Say about the U-Turn in Trucking

“When times are tough, the thinking switches to the short-term. Many fleets are just fighting for survival.”

Orders for Class-8 trucks – the heavy trucks that haul a large part of the goods-based economy across the US – plunged by 71% in May compared to May last year, to — as FTR Transportation Intelligence called it this afternoon — a “chilly 10,400” orders. It was “the lowest volume for Class 8 orders since July 2016 and the weakest month of May since 2009,” FTR said in the statement (data via FTR):

This comes after orders had already plunged year-over-year by 52% in April, 67% in March, 58% in February and January, and 43% in December. It was the seventh month in a row of year-over-year declines (data via FTR):

The cyclical nature of the industry is legendary. Trucking companies get exuberant when capacity tightens and freight rates soar – which they did in late 2017, that in 2018 turned into an outright capacity shortage and a driver shortage.

This boom was fueled in part by a decision in Corporate America to build up inventories in the US to front-run potential import tariffs. This put additional pressure on trucking capacity, and on freight rates. And it motivated trucking companies to order new equipment to meet demand. Given the capacity pressure at the time, they tried to get the orders in ahead of the others, and this created a phenomenal boom in orders — and at truck manufacturers, historic order backlogs.

Then the other part of the cycle begins. As these new trucks enter service, capacity rises, taking pressure of the system. This was expected.

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

The Most Splendid Housing Bubbles in Canada Deflate Further

The Most Splendid Housing Bubbles in Canada Deflate Further

Vancouver prices drop. Toronto down 3.7% from peak, flat for 10 months. Winnipeg plunges most since at least 1990. Quebec City flat for 6 years.

In Greater Vancouver, BC, Canada, house prices fell 0.4% in April from March, the ninth month in a row of month-to-month declines, according to the Teranet-National Bank House Price Index. The index is down 4.7% from the peak in July 2018, the sharpest nine-month decline since July 2009. And it’s down 2.8% from April last year. One of the most splendid housing bubbles in the world is now deflating before our very eyes, after prices had skyrocketed 316% from January 2002 to the peak in July 2018 – meaning prices had more than quadrupled in 16 years:

The Teranet-National Bank House Price Index tracks single-family house prices, based on “sales pairs,” comparing the sales price of a house in the current month to the last sale of the same house years earlier (methodology). Using “sales pairs” eliminates the issues that affect median and average price indices but has its own limitations. These median and average house prices, which are much more volatile, are now showing much sharper price declines for Vancouver.

Because the Teranet index uses a similar methodology of “sales pairs” as the S&P CoreLogic Case Shiller index for US housing markets, the indices produce comparable metrics. So let’s compare Vancouver’s housing bubble to the also deflating housing bubble in the San Francisco Bay Area. Splendid v. Splendid. The chart below shows the data of Vancouver (black columns) and San Francisco (red columns), with both indices converted into “percent change from January 2002.”

As the chart above shows, Vancouver’s housing market dipped briefly during the Financial Crisis while San Francisco’s market went into a hard four-year downturn, as the US housing bust morphed into the Mortgage Crisis that contributed to the Financial Crisis.

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

What Would Stocks Do in “a World Without Buybacks,” Goldman Asks

What Would Stocks Do in “a World Without Buybacks,” Goldman Asks

Companies buying back their own shares has “consistently been the largest source of US equity demand.” Without them, “demand for shares would fall dramatically.” Too painful to even imagine.

Goldman Sachs asked a nerve-racking question and came up with an equally nerve-racking answer: What would happen to stocks “in a world without buybacks.” Because buybacks are a huge deal.

In the fourth quarter 2018, share repurchases soared 62.8% from a year earlier to a record $223 billion, beating the prior quarterly record set in the third quarter last year, of $204 billion, according to S&P Dow Jones Indices on March 25. It was the fourth quarterly record in a row, the longest such streak in the 20 years of the data. For the whole year 2018, share buybacks soared 55% year-over-year to a record $806 billion, beating the prior record of $589 billion set in 2007 by a blistering 37%!

Share buybacks had already peaked in 2015 and ticked down in 2016 and 2017. Then the tax reform act became effective on January 1, 2018, and share buybacks skyrocketed.

The record buybacks in Q4 came even as stock prices declined on average 5.3%, according to S&P Down Jones Indices. On some bad days during the quarter, corporations were about the only ones left buying their shares.

For the year 2018, these were the top super-duper buyback queens:

  • Apple: $74.2 billion
  • Oracle: $29.3 billion
  • Wells Fargo $21.0 billion
  • Microsoft: $16.3 billion
  • Merck: $9.1 billion

But who, outside of corporations buying back their own shares, was buying shares? Goldman Sachs strategists answered this question in a report cited by Bloomberg, that used data from the Federal Reserve to determine “net US equity demand.” These are the largest investor categories other than corporate buybacks, five-year totals:

  • Foreign investors shed $234 billion.
  • Pension funds shed $901 billion, possibly to keep asset-class allocations on target as share prices soared.
  • Stock mutual funds shed $217 billion.
  • Life insurers added 61 billion
  • Households added $223 billion.

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

We’re Flying with Eyes Partially Closed into Turbulent Markets & Economy

We’re Flying with Eyes Partially Closed into Turbulent Markets & Economy

But for the markets: “No Data is Good Data”

“NOTICE: Due to a lapse in federal funding this website is not being updated,” it says in big lettering against a bright red background at the top of the data sites of the Department of Commerce.

This morning, the Commerce Department was supposed to release crucial data for the housing market: sales and inventories of new single-family houses (“new home sales”). This includes sales and inventory figures, how many months of supply there was, and the median sales price of the new houses that sold. Today’s release would have been for sales that closed in December. But the Commerce Department is part of the shutdown, and no data was released.

This makes it the second month in a row that we have not seen national data on new home sales. The last month for which we received data was for October, released on November 28. And it was very lousy. So thank God that there is no data, because homebuilder stocks that had gotten battered by a series of lousy data have surged during the absence of data.

This morning, we were also supposed to get the report by the Commerce Department on “durable goods” with crucial data on orders and shipments in the manufacturing sector. But no.

This morning, we were also supposed to get the report on steel imports from the International Trade Administration, but it is part of the Commerce Department. The US is the largest steel importer in the world, and given all the hullaballoo about the tariffs on steel imports, it would be good to know for the industry and data watches alike what is going on. But there is no data on steel imports.

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

Stock-Market Margin Debt Plummets Most Since Q4 2008

Stock-Market Margin Debt Plummets Most Since Q4 2008

Wow, that was fast. Margin calls.

During the ugly stock-market December, whose ugliness bottomed out on Christmas Eve, a nasty November, and the ugliest October anyone can remember, margin debt plunged by a combined $93.8 billion, the most since Q4 2008, after Lehman Brothers filed for bankruptcy.

In December alone, margin debt plunged by $38.3 billion, to $554.3 billion, FINRA (Financial Industry Regulatory Authority) reported this morning. This was just a hair less than October’s plunge of $40.5 billion, and both had been the steepest drops since late 2008:

The only form of stock market leverage that is reported monthly is “margin debt” – the amount individual and institutional investors borrow from their brokers against their portfolios. But no one knows the amount of total stock-market leverage from all forms of leverage, but we know it’s a lot higher than margin debt by itself.

Stock market leverage takes many forms. It includes “securities-based loans” (SBLs) that brokers extend to their clients, and that some of them report annually, though they don’t have to. And occasionally, we get a tidbit about an individual fiasco such as when a $1.6 billion SBL to just one guy blows up. And there are other ways to use leverage to fund stock holdings, including loans at the institutional level, loans by companies to their executives to buy the company’s shares, etc. But reported margin debt gives us a feel for which direction overall stock-market leverage is going.

Stock market leverage is the big accelerator on the way up, when people and institutions borrow money to buy stocks. And it’s the big accelerator on the way down when margin calls and other financial pressures turn these investors into forced sellers. The money from the proceeds of those stock sales doesn’t then sit on the sidelines or go into other stock purchases…

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

Fed’s Balance Sheet Reduction Reaches $402 Billion

Fed’s Balance Sheet Reduction Reaches $402 Billion

The QE unwind has started to rattle some nerves.

For the past two months, the sound of wailing and gnashing of teeth about the Fed’s QE unwind has been deafening. The Fed started the QE unwind in October 2017. As I covered it on a monthly basis, my ruminations on how it would unwind part of the asset-price inflation and Bernanke’s “wealth effect” that had resulted from QE were frequently pooh-poohed. They said that the truly glacial pace of the QE unwind was too slow to make any difference; that QE had just been a “book-keeping entry,” and that therefore the QE unwind would also be just a book-keeping entry; that QE had never caused any kind of asset price inflation in the first place, and that therefore the QE unwind would not reverse that asset-price inflation, or whatever.

But in October last year, when all kinds of markets started reversing this asset price inflation, suddenly, the QE unwind got blamed, and the Fed – particularly Fed Chairman Jerome Powell – has been put under intense pressure to cut it out. Yet it continues:

The Fed shed $28 billion in assets over the four weekly balance-sheet periods of December. This reduced the assets on its balance sheet to $4,058 billion, the lowest since January 08, 2014, according to the Fed’s balance sheet for the week ended January 3. Since the beginning of this “balance sheet normalization,” the Fed has now shed $402 billion.

According to the Fed’s plan released when the QE unwind was introduced, the Fed is scheduled to shed “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month – now that the QE unwind has reached cruising speed – for a total of “up to” $50 billion a month. So how did it go in December?

Treasury Securities

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

US Dollar Status as Global Reserve Currency?

US Dollar Status as Global Reserve Currency?

So, how hot is the Chinese Renminbi? And is the euro dead yet?

The US dollar’s role as global reserve currency is defined by the amounts of US dollar-denominated assets – US Treasury securities, corporate bonds, etc. – that central banks other than the Fed are holding in their foreign exchange reserves. To diminish the dollar’s role as a global reserve currency, these central banks would have to dump the dollar.

So, let’s see. Total global foreign exchange reserves, in all currencies, came in at $11.4 trillion in the third quarter, according to the IMF’s data on “Currency Composition of Official Foreign Exchange Reserves” (COFER), released this morning. The amount of USD-denominated exchange reserves was $6.63 trillion. This amounted to 61.9% of total foreign exchanges reserves held by central banks, the lowest since 2013:

In the chart above, note the arrival of the euro. It became an accounting currency in the financial markets in 1999, replacing the European Currency Unit. Euro banknotes and coins appeared on January 1, 2002. At the end of 2001, the dollar’s share of reserve currencies was 71.5%. In 2002, it dropped to 66.5%. Now it’s down to 62.2%.

The euro replaced a gaggle of European currencies that had been held as foreign exchange reserves, on top of which was the Deutsche mark.

In Q3, the euro’s share rose to 20.5%, the highest since Q4 2014. The creation of the euro was an effort to reduce the dollar’s hegemony. At the time, the theme was that the euro would reach “parity” with the dollar. But the euro Debt Crisis ended that dream.

The other major reserve currencies don’t have a “major” share. The combined share of the dollar and the euro, at 82.4%, leaves only 17.6% for all other currencies combined. The two currencies with the largest share in that group are the Japanese yen, at 5.0%, and the UK pound sterling, at 4.5%.

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

Nothing Goes to Hell in a Straight Line, Not Even Stocks

Nothing Goes to Hell in a Straight Line, Not Even Stocks

But a whole generation of investors has never been through a Nasdaq-bubble unwind, and they’re shocked.

I just dug out my “Dow 20,000” hat, but I might not need it for a while because nothing goes to hell in a straight line. And I still have my “Dow 10,000” hat somewhere just in case, though I doubt I’ll need to go look for it anytime soon for the reasons I’ll explain in a moment.

I have to admit, this was a beauty of a Santa rally. We were promised a Santa rally by the buy-buy-buy hype organs on Wall Street, so here we go with our Santa rally:

The Dow dropped 6.9% this week, to 22,445, and is down 9.2% for the year. It’s down 16.3% from its all-time peak in September. It’s only about 11% away from my “Dow 20,000” hat. The last time we saw 20,000 on the way up was in January 2017. But rolling back 21 months of gains in the stock market — from September 2018 back to January 2017 — is nothing. The big deal is how much the Dow has surged over those 21 months from 20,000 to the peak in September: 35%.

Over the same period, the economy grew maybe 5%. So going back to 20,000 will just surgically remove the very tippy top off the bubble.

The S&P 500 Index dropped 7.1% this week and is down 9.6% year to date, down 17.5% from the peak in September, and back where it had first been on June 1, 2017.

The chart is not exactly pretty, with that nearly straight red line south, but let me assure you again: Nothing goes to hell in a straight line, and in a moment, I’ll get to why this one won’t either.

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

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

“Severe Collapse” of Home Prices Might Trigger a “Financial-Institution Crisis” in Australia: OECD Frets about the Bank

“The authorities should prepare contingency plans.” The big four banks are too exposed to mortgages. Even if the banks don’t topple, the economy will get hit hard.

In its latest report on Australia, the OECD focuses to a disturbing extend on housing, household debt, what the current housing downturn might do to the otherwise healthy economy, and what the risks are that this housing downturn will lead to a financial crisis for the big four Australian banks, an eventuality that it says “authorities” should make “contingency plans” for.

The big four banks are huge in relation to the Australian stock market and the overall economy: Their combined market capitalization, at A$341 billion, even after today’s sell-off following the OECD report – accounts for 26% of Australia’s total stock market capitalization.

How they dominate the stock market showed up on Monday after the release of the report:

  • Common Wealth Bank of Australia (CBA): -2.98%
  • Westpac (WBC): -3.38%
  • Australia and New Zealand Banking Group (ANZ): -4.09%
  • National Australia Bank (NAB): -2.54%

The overall ASX stock index on Monday dropped 2.27%.

These big four are heavily owned by Australian pension funds, retail investors, and the like and form a big part of the retirement nest egg of the nation. So a banking crisis that involves the Big Four matters on all fronts – and the OECD report even pointed out that a collapse in the share prices of the Big Four would itself impact the overall economy negatively.

The report (PDF) starts by explaining just how strong the economy is in Australia:

With 27 years of positive economic growth, Australia has demonstrated a remarkable capacity to sustain steady increases in material living standards and absorb economic shocks.

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

The Fed Explains the Rate Hikes: To Prevent Financial Crisis 2

The Fed Explains the Rate Hikes: To Prevent Financial Crisis 2

Instead of “bubble” or “collapse,” it uses “valuation pressures” and “broad adjustment in prices.” Business debt, not consumer debt, is the bogeyman this time.

Preventing another financial crisis – or “promoting financial stability,” as the Federal Reserve Board of Governors calls it – isn’t the new third mandate of the Fed, but a “key element” in meeting its dual mandate of full employment and price stability, according to the Fed’s first Financial Stability Report.

“As we saw in the 2007–09 financial crisis, in an unstable financial system, adverse events are more likely to result in severe financial stress and disrupt the flow of credit, leading to high unemployment and great financial hardship.”

Financial firms are OK-ish, except for hedge funds.

The largest banks are “strongly capitalized” and are better able to withstand “shocks” than they were before the Financial Crisis; and “credit quality of bank loans appears strong, although there are some signs of more aggressive risk-taking by banks,” the Financial Stability Report says.

Also, leverage at broker-dealers is “substantially below pre-crisis levels.” And “insurance companies have also strengthened their financial position since the crisis.”

A greater worry are hedge funds that are now being leveraged up to the hilt. “A comprehensive measure that incorporates margin loans, repurchase agreements (repos), and derivatives – but is only available with a significant time lag – suggests that average hedge fund leverage has risen by about one-third over the course of 2016 and 2017.”

“The increased use of leverage by hedge funds exposes their counterparties to risks [that would include banks and broker-dealers] and raises the possibility that adverse shocks would result in forced asset sales by hedge funds that could exacerbate price declines.”

But here is why they won’t get bailed out: “That said, hedge funds do not play the same central role in the financial system as banks or other institutions.”

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

Why I Think this Sell-Off is Just One Step in Methodical Unwind of Stock Prices

Why I Think this Sell-Off is Just One Step in Methodical Unwind of Stock Prices

One after the other, individual stocks are getting crushed.

It was an ugly Monday and Tuesday followed by a Wednesday that at first look like a real bounce but ended with the indices giving up their gains. This was followed, mercifully, by Thursday when markets were closed, which was followed unmercifully by Friday, during which the whole schmear came unglued again.

The S&P 500 index dropped 0.7% on Friday to 2,632 and 3.8% for Thanksgiving week, though this week is usually – by calendar black-magic – a good week, according to the Wall Street Journal: During Thanksgiving weeks going back a decade, the S&P 500 rose on average 1.3%.

This leaves the S&P 500 index 1.5% in the hole year-to-date. It’s now back where it had first been on November 30, 2017:

Clearly, when seen over the longer term, the sell-off for now still belongs to the small-fry among sell-offs, with S&P 500 down just 10.5% from its peak:

The Dow dropped 0.7% on Friday and 4.4% during Thanksgiving week, to 24,286. It’s 1.75% in the hole for the year. Technically speaking, it’s not even in a correction, being down only 9.9% from its peak.

And the Nasdaq, dropped 0.5% on Friday and 4.3% during Thanksgiving week. According to the Wall Street Journal, during Thanksgiving week over the past 20 years, the Nasdaq rose on average 1.3%. So this is no good for calendar-black-magic aficionados. Where’s the free-wheeling holiday spirit?

The Nasdaq is now down 14.7% from its peak at the end of August but remains up 0.5% year-to-date.

The Russell 2000 small-caps index edged down today and is down 14.5% from its peak on August 31. It’s 3% in the hole year-to-date and right back where it had first been on September 27, 2017:

…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…

Olduvai IV: Courage
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Olduvai II: Exodus
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