The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling, a funny thing happened after the peak.
Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.
The millions in upfront fees, along with their lack of conscience in bribing Moody’s and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child’s play compared to the last six years).
Greenspan created the atmosphere for the greatest mal-investment in world history. As he raised rates from 2004 through 2006, the titans of finance on Wall Street should have scaled back their risk taking and prepared for the inevitable bursting of the bubble. Instead, they were blinded by unadulterated greed, as the legitimate home buyer pool dried up, and they purposely peddled “exotic” mortgages to dupes who weren’t capable of making the first payment. This is what happens at the end of Fed induced bubbles. Irrationality, insanity, recklessness, delusion, and willful disregard for reason, common sense, historical data and truth lead to tremendous pain, suffering, and financial losses.
Once the Wall Street machine runs out of people with the financial means to purchase a home or buy a new vehicle, they turn their sights on peddling their debt products to financially illiterate dupes. There is a good reason people with credit scores below 620 are classified as sub-prime. Scores this low result from missing multiple payments on credit cards and loans, having multiple collection items or judgments and potentially having a very recent bankruptcy or foreclosure. They have low paying jobs or no job at all. They do not have the financial means to repay a large loan. Giving them a loan to purchase a $250,000 home or a $30,000 automobile will not improve their lives. They are being set up for a fall by the crooked bankers making these loans. Heads they win, tails the dupe gets kicked out of that nice house onto the street and has those nice wheels repossessed in the middle of the night.
The subprime debacle that blew up the world in 2008 was created by the Federal Reserve, working on behalf of their Wall Street owners. When interest rates are set by central planners well below levels which would be set by the free market, based on risk and return, it creates bubbles, mal-investment, and ultimately financial system disaster. Did the Fed, Wall Street, politicians, and people learn their lesson? No. Because we bailed them out with our tax dollars and have silently stood by while they have issued $10 trillion of additional debt to solve a debt problem. The deformation of our financial system accelerates by the day.
The $3.5 trillion of QE, six years of 0% interest rates for Wall Street (why are credit card interest rates still 13%?), and $8 trillion of deficit spending by the Federal government have provided the outward appearance of economic recovery, as the standard of living for most Americans has declined significantly. With real median household income still 6.5% BELOW 2007 levels, 7.3% BELOW 2000 levels, and about equal to 1989 levels, the only way the ruling class could manufacture a fake recovery is by ramping up the printing presses and reigniting a housing bubble and an auto bubble. They even threw in a student loan bubble for good measure.
The entire engineered “housing recovery” has had a suspicious smell to it all along. The true bottom occurred in 2009 with an annual rate of 4 million existing home sales. An artificial bottom of 3.5 million occurred in 2010 after the expiration of the Keynesian first time home buyer credit that lured more dupes into the market. The current rate of 5.31 million is at 2007 crash levels and on par with 2001 recession levels. With mortgage rates at record low levels for five years, this is all we got?
What really smells is the number of actual mortgage originations that have supposedly driven this 35% increase in existing home sales. If existing home sales are at 2007 levels, how could mortgage purchase applications be 55% below 2007 levels? If existing home sales are up 35% from the 2009/2010 lows, how could mortgage purchase applications be flat since 2010?
Economic Crash, well, new home sales are up 80% from the 2010 lows, but before you get as excited as a CNBC bimbo over the “surging” new home sales, understand that new home sales are still 60% BELOW the 2005 high and 25% below the 1990 through 2000 average. So, in total, there are 1.5 million more annual home sales today than at the bottom in 2010. But mortgage originations haven’t budged. That’s quite a conundrum.
As you can also see, the median price for a new home far exceeds the bubble highs of 2005. A critical thinking individual might wonder how new home sales could be down 60% from 2005, while home prices are 15% higher than they were in 2005. Don’t the laws of supply and demand work anymore? The identical trend can be seen in the existing homes sales market. The median price for existing home sales of $228,700 is an all-time high, exceeding the 2005 bubble levels. Again, sales are down 30% since 2005. I wonder who is responsible for this warped chain of events?
You guessed it – the Federal Reserve. There is no doubt these Wall Street captured academics with their models, theories, formulas, and Keynesian beliefs have created another immense bubble that endangers a global financial system already teetering on the brink of collapse due to central bank shenanigans by EU, Japanese, and Chinese central bankers. QE and ZIRP have encouraged rampant gambling by amoral greed driven financial institutions. John Hussman sums up the “solution” implemented by the serial bubble blowers at the Fed.
The main impact of suppressed interest rates is to encourage yield-seeking speculation, to give low quality creditors access to the capital markets, to misallocate scarce saving, to subsidize leveraged carry trades, to reduce the long-term accumulation of productive capital, and to foment serial bubbles and crashes.
The suppressed interest rates and Yellen Put have encouraged Wall Street hedge funds, banks, finance companies, and fly by night mortgage brokers to finance a buy and rent scheme, house flippers, and once again subprime borrowers. The withholding of foreclosures from the market and the hedge fund purchase of millions of homes drove home prices higher. The artificially low mortgage rates also allowed people to buy more house than they normally could buy, thereby driving home prices even higher. This market manipulation has now priced out all but the richest Americans from buying a home. As expected, the Wall Street machine has decided to try and steal home with two outs in the bottom of the ninth. They’ve decided loaning money to people who are incapable of repaying the loan will surely work this time.
Existing home sales fell in August by 4.8%, and the rate of increase has been decelerating over the last twelve months. Hedge funds stopped buying, first time buyers are few as they are saddled with student loan debt, and the middle class doesn’t have the financial wherewithal to trade up. The Wall Street debt machine is running out of financially able customers, so they’ve ramped up subprime lending at the worst possible time. While overall existing home sales were up 6.2% over last year, the number of subprime first mortgage originations was up 30.5%, subprime home equity loans was up 29.5%, and subprime home equity lines of credit rose 20.4%. The percentage of subprime mortgage loans is the highest since 2008. While prime lending declines, subprime lending accelerates. This will surely end well.
And this is being promoted by the government through the FHA. Subprime mortgages are increasingly being underwritten by thinly capitalized non-banks and guaranteed by FHA. In 2012, when this data was first tracked, large banks represented 65.4% of FHA-backed loans. That number is now 29.6%. In their place, non-banks now represent 62.2% of the FHA lending. These fly by night outfits, who proliferated during the 2003 – 2008 subprime disaster, have little or no capital cushion and when these mortgages begin to default they will go bankrupt quickly, leaving the FHA (you the taxpayer) on the hook for the inevitable losses.
The FHA has been directed by their politician benefactors to pump up the housing market at any cost. You can get an FHA loan with a credit score as low as 500, so long as you have a 10% down payment. And once you hit a 580 credit score, you only need a 3.5% down payment. The FHA is exempt from the qualified mortgage requirement of a 43% debt-to-income ratio. Many loans have a debt-to-income above 55%. The FHA only looks at mortgage payments in their calculation. The FHA is willing to accept a gift or inheritance as a down payment. You could have no savings, a 500 FICO, a 50% debt-to-income and an inheritance and that would be sufficient to get you a loan.
These fly by night mortgage companies are created by slimy get rich quick hucksters who are willing to take huge risks, because there is a big difference between the risk that faces the company, and the risk that faces the owner. He will take incredibly rich commissions on all loans he books. Wall Street is again packaging these subprime slime loans into high yielding mortgage backed securities and getting the rating agencies to stamp it with a AAA rating.
Foolish investors receiving a good yield and a guarantee from the US government, are as clueless as they were in 2008. The owner of the mortgage company doesn’t care about default risk, since some other sucker has assumed that risk. When the mortgage company goes bankrupt, the owner has no personal liability. When it all blows up again, an already bankrupt FHA will be on the hook, which really means the taxpayer will pay again. You are underwriting the new subprime crisis.
This exact same scenario is also playing out in the economically important auto market. It is clear the Fed, Treasury, Wall Street and the politicos in D.C. decided they needed to re-inflate the housing and auto bubbles to provide the appearance of economic recovery so they could resume their looting and pillaging of the national wealth. They have succeeded in ramping up auto sales from the 10.4 million annual rate in 2009 to 17.5 million in 2015, if you can call these sales. Short-term rentals is a better description. Auto leasing now accounts for 30% of “sales” (up from 22% in 2012), while subprime auto “sales” accounted for another 23.5%. The vast majority of the other sales are done with 7 year 0% financing. Does that sound like a sound business formula?
And now they’ve run out of dupes. The seasonally adjusted annual rate of sales for August 2015 was 17.2 million, flat with August 2014 and down from 17.5 million in July 2015. As the auto sales have gone flat and are poised to fall, the Wall Street finance machine has ramped up subprime lending from 18% of all loans in 2010 to 23.5% today. With overall sales flat with last year, subprime lending is up 9.6% in the last year. The pace of subprime auto loans has been more than double the pace of prime auto loans since 2010.
Over 10% of subprime auto loans are delinquent within the first twelve months. Subprime auto loan delinquency rates are soaring by 20% at Ally Financial. Santander is a Lehman Brothers in the making as their total delinquency rate approaches 20%. A critical thinking person might wonder why automaker profits are in decline, while GM and Ford stock prices are well below 2011 levels, if the auto market is booming.
The table is set for the next financial crisis. The apologists for the warped ideology that has resulted in $10 trillion of additional debt being layered on the original un-payable $52 trillion, argue subprime lending is lower than the 2008 peak, so all is well. They fail to realize the system is far more fragile and will collapse once the next Lehman moment arrives. The country is already in, or headed into recession. All economic indicators are flashing red. The stock market has fallen over 10% in the last month. Virtually every new car owner you see driving that fancy BMW, Lexus, or Volvo is underwater on their auto loan. Home price growth has stalled at record levels. Mortgage rates are poised to rise from record lows. We all know what happens next. Look out below.
Some people never learn. They follow the same path that destroyed their finances in the past. Wall Street is desperately packaging the increasing amounts of subprime slime in new derivatives of mass destruction and peddling them to clients, while shorting those same derivatives. It’s called the Goldman Sachs method. When home prices begin to tumble, these derivatives will self-destruct again. What is happening today is nothing more than rearranging the deck chairs on the Titanic. The iceberg has been struck, we’re taking on water, and this sucker is going to sink. Game Over.
“Part of the reason the Fed found it so difficult last week to justify a move away from zero interest rates is that the Fed seems incapable of recognizing, much less admitting, the speculative risks it has created. The strongest reason to normalize monetary policy was to reduce those risks, but the proper time to have done that was years ago. At this point, obscene equity valuations are already baked in the cake on valuation measures that are reliably correlated with actual subsequent stock market returns. At this point, hundreds of billions of dollars of low-grade covenant-lite debt have already been issued at risk premiums that are next to nothing. The bursting of this bubble is no longer avoidable. If history is any guide, policy makers will manage the resulting disruption by the seat of their pants, since they seem incapable of learning from history itself.” – John Hussman
Just before the FOMC decided to not decide last Thursday, we asked if the scuffle depicted below was Japanese lawmakers’ attempt to act out what they imagined might go on in the Eccles Building during what was billed as the most important Fed decision in recent history:
We went on to note that Japan – which, you’re reminded, is the poster child for Keynesian insanity with a debt load that now totals ¥1,057,224,000,000,000 – tried to raise rates at one point, only to reverse course within seven months.
Now that the Fed is allegedly set to hike at some point in the not-entirely-distant future, and now that Japan has completely lost its mind and declared that despite Abenomics’ abysmal and demonstrable failure, the economy will somehow expand at a 20% clip going forward, we thought this an oppotune time to demonstrate, with one helpful infographic, why the US can never raise rates. Put simply: the US is second only to Japan on the list of countries with the worst debt to central government revenue ratios.
Coming soon to Washington:
Scientists Turn into Stalinists
Last week, we happened across a press report about a group of climate scientists so eager to shut up their critics that they want to employ the State’s police, courts and jailers for the purpose. Specifically, a group of academic (and presumably tenured) climate alarmists supporting the “CAWG” theory (CAWG=”catastrophic anthropogenic global warming”) have written a letter to president Obama, attorney-general Lynch and OSTP director Holdren, demanding that so-called “climate deniers” (or the organizations allegedly supporting them) be prosecuted under the RICO act (you can see the document here (pdf) – already its first paragraph is “alarming”, as they inter alia brag about things they have incorrectly predicted to happen for more than 35 years, such as an increase in “extreme weather”).
This is not the first time that climate alarmists are letting their inner Stalin hang out and are trying to impose a spot of Lysenkoism for the “good of humanity”. For those not au fait with Lysenko: the man was an influential Soviet biologist who came up with an erroneous theory “based on dialectic materialism” about how to improve crop yields. It never worked, but over the 44 years during which his influence lasted (!), more than 3,000 biologists were either fired, jailed and even executed for opposing his views (a number of modern-day radical climate alarmists are also on record for demanding the harshest imaginable punishments for “deniers”).
The Debate over the Poorly Conceived AGW Theory is not Over
Here are a few excerpts from the letter we want to briefly comment on:
“The risks posed by climate change, including increasing extreme weather events, rising sea levels, and increasing ocean acidity – and potential strategies for addressing them – are detailed in the Third National Climate Assessment (2014), Climate Change Impacts in the United States. The stability of the Earth’s climate over the past ten thousand years contributed to the growth of agriculture and therefore, a thriving human civilization. We are now at high risk of seriously destabilizing the Earth’s climate and irreparably harming people around the world, especially the world’s poorest people.
Apart from the absurd insinuation that only “government-funded science is good science”, as if none of the people involved had any self-interests, science is not the result of some imaginary “consensus” or attains the status of holy writ once its conclusions appear in a government-sponsored paper. As an example, it took the “consensus” 40 years to accept Alfred Wegener’s theory on continental drift, by which time he was dead.
In principle there is nothing wrong with employing a conceptual approach in the natural sciences, but eventually, empirical data must bear hypotheses out. It is moreover not true that we can “afford” to bring industrial civilization to a standstill on the off-chance that the alarmists might be right one day, especially considering how wrong they have been so far.
Let us just briefly address the handful of things listed above. “Extreme weather events” like hurricanes and tropical cyclones have actually done the precise opposite of what has been and continues to be widely claimed – their frequency has declined to multi-decade lows (e.g. in Australia, the “lowest level of cyclone activity in modern history” was reported last year. US readers will have noticed that since Katrina a decade ago and the intrusion of Sandy, hurricane activity has actually been de minimis – statistics confirm it loud and clear).
Global tropical cyclone frequency hits a multi-decade low – click to enlarge.
Rising sea levels: it appears the rise is so slow that the catastrophes that have been predicted since at least 1980 not only have not happened, but that the opposite has occurred in these cases as well. No Micronesian islands have sunk beneath the waves – au contraire, they are growing. Of the 50 million “climate refugees” that were certain to swamp us by 2010, only one has shown up to date, and this seems to be a case of someone trying to get a residence and work permit in a developed country by means of an innovative method. The exact opposite of the alarmist predictions happened in this case as well: the very regions that were supposed to be the main source of “climate refugees” and should have been almost depopulated by now have seen the strongest population growth on the planet.
We haven’t followed the debate on the “acidification of the oceans” very closely, but we note that there definitely is a debate, as this notion appears to be based on questionable data (a.k.a. “sparse and contradictory evidence”). Lastly, even the alarmists are acknowledging that there has been a near 19 year “pause” in global warming (although NOAA is scandalously altering past surface temperature records from their actually measured to “assumed” values, in order to create a warming trend literally from thin air). They have hitherto seen fit to provide 66 different excuses for why the forecasts of their models have been so completely wrong. It is very mean of Mother Nature that she refuses to cooperate with the alarmist agenda. Of course, that the central premise of the AGW theory might actually be wrong isn’t even considered by these worthies (luckily they haven’t yet found ways to retroactively fiddle with the satellite data).
The Pause – satellite measurements have detected no warming for nearly 19 years
The sentence that “the poor will be endangered” unless we regulate industrialized civilization out of existence is preposterous in the extreme. Again, if you assume the exact opposite to be true, you will be correct. In the past, human civilization has flourished whenever temperatures were a lot warmer than they are today (e.g. during the medieval warm period, vineyards thrived in the Scandinavian countries and global population growth and progress both accelerated greatly).
One of the biggest problems with the economically damaging regulations demanded by the alarmists is precisely that they cynically deprive the world’s poor of the possibilities for development the rich countries had at their disposal (see this report for details). In fact, much of the proposed legislation is ultimately nothing but a socialist wealth distribution scheme (that will not only redistribute, but ultimately destroy wealth) – as its major political proponents are occasionally admitting in unguarded moments. As has been noted elsewhere, this is simply “ideology masquerading as science”.
Suppression of Dissent to Preserve the Gravy Train
It seems to us, all of the above should be seen as grounds for vigorous debate, both on the scientific and the political level, before any more harm is done by costly (and ultimately useless) legal activism. However, this definitely isn’t how the letter writers are seeing it:
“We appreciate that you are making aggressive and imaginative use of the limited tools available to you in the face of a recalcitrant Congress. One additional tool – recently proposed by Senator Sheldon Whitehouse – is a RICO (Racketeer Influenced and Corrupt Organizations Act) investigation of corporations and other organizations that have knowingly deceived the American people about the risks of climate change, as a means to forestall America’s response to climate change.”
In other words, those who disagree with the alarmists (which is ever easier to do as one after another of their predictions fails to come true) should be treated like the mafia or similar criminal organizations. Needless to say, this would not exactly be conducive to scientific or policy debate. We have yet to see the opponents of string theory demand the jailing of its proponents (or vice versa), in spite of their fierce disagreements.
Our first thought was therefore that one should probably “follow the money” – that the alarmists are probably increasingly worried that their gravy train might be derailed; that their lavish grants and privileges, including their role as “philosopher kings” advising the politically powerful, could come under threat as empirical evidence against their theories keeps piling up. This has inter alia also led to a recent rash of ever more hysterical apocalyptic predictions (see e.g. the laughable “sea level rise” panic outburst from Über-alarmist Dr. James Hansen, which is even denounced by his fellow AGW alarmists – i.e., it is too absurd even for them).
Before we found the time to write this missive, reality has struck in the form of a rather sizable PR problem for the leader of the group of letter writers – and it has indeed to do with “lavish grants”. As Climate Depot reports, “Scientist leading effort to prosecute climate skeptics under RICO ‘paid himself & his wife $1.5 million from govt climate grants for part-time work’”. You couldn’t make this up.
George Mason University Professor Jagadish Shukla a Lead Author with the UN IPCC, reportedly made lavish profits off the global warming industry while accusing climate skeptics of deceiving the public. Shukla is leader of 20 scientists who are demanding RICO (Racketeer Influenced and Corrupt Organizations Act) charges be used against skeptics for disagreeing with their view on climate change.
Shukla reportedly moved his government grants through a ‘non-profit’. The group “pays Shukla and wife Anne $500,000 per year for part-time work,” Prof. Roger Pielke Jr. revealed. “The $350,000-$400,000 per year paid leader of the RICO 20 from his ‘non-profit’ was presumably on top of his $250,000 per year academic salary,” Pielke wrote. “That totals to $750,000 per year to the leader of the RICO 20 from public money for climate work and going after skeptics. Good work if you can get it,” Pielke Jr. added.
AGW has indeed become an “industry”, albeit an entirely taxpayer funded one. It looks more and more like a giant racket. If it were only a racket, there would be no problem – but it also pursues an agenda, under the pretense that we need to “save the planet” from what increasingly looks like natural variations we have little or no influence over. The agenda however has a clear leftist-authoritarian bent, as all the demands and already implemented policies involve more regulation and government control over the economy, are harmful to economic development and progress, are bound to condemn the poor to remaining poor, and aim at redistributing wealth in a manner that will simply end up destroying it to the benefit of a handful of cronies.
That people obviously benefiting greatly from this racket have the gall to demand that the State treat their critics as major criminals in Stalinesque fashion is really jaw-dropping chutzpa.
The caste of climate alarmists reminds us strongly of assorted doomsayers throughout history. They have almost become a kind of priestly caste, accusing us of committing the alleged “sin” of capitalism, even while they reserve for themselves the right to partake of its fruits to an extent few others are able to (as Greenpeace founder Patrick Moore notes, “environmentalism has become a religion”). Mind, we don’t believe genuine environmental concerns should be ignored, but AGW looks more and more like a contrived non-issue. The hysteria that has been on display of late is probably an indication though that its proponents are actually losing the debate.
Forget currency collapses, capital outflows, crashing confidence, and current account carnage, there is one major reason why Brazil – no matter what – will not bounce back quickly…
As alive and well as the entrepreneurial spirit maybe (though with confidence at record lows, we suspect otherwise), it takes a stunning 83 days to “start a business” in Brazil…16x longer than in the US and almost 3x longer than China and India.
So absent massive and far-reaching reforms to collapse the bureacratic quagmire that is the corrupt government of Brazil (and crush the government sector’s employment), no matter what actions, interventions, and confidence-inspiring acts the central planners undertake, the growth spirit simply won’t be there!!!
Source: Goldman Sachs
The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).
Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.
Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.
Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.
Here is a brief summary of why, based on pure economic theory, NIRP is a preposterous concept. It contravenes the laws of time preference, commanding by diktat that cash is worth less than credit. It forces people into the practical discomfort of treating physical possession of money as worth less than not possessing it. Suddenly, we find ourselves riding the train of macroeconomic fallacies at high speed into the buffers at the end of the line. Of course, some central bankers may sense this, but they are still being compelled towards NIRP through lack of other options, in which case holding cash will have to be banned or taxed by one means or another. This would, Haldane argues, allow them to force interest rates well below the zero bound and presumably keep them there if necessary.
One objective of NIRP will be to stimulate price inflation, and Haldane also tells us that economic modelling posits a higher target of 4%, instead of the current 2%, might be more appropriate to kick-start rising prices and ensure there is no price deflation. But to achieve any inflation target where ZIRP has failed, NIRP can be expected to be imposed for as long as it takes, and all escape routes from it will have to be closed. This is behind the Bank of England’s interest in the block-chain technology developed for bitcoin, because government-issued digital cash would allow a negative interest rate to be imposed at will with no escape for the general public.
Fortunately for the general public this remedy cannot be implemented yet, so it can be ruled out as a response to today’s falling stock markets and China’s credit contraction. What is deeply worrying is the intention to pursue current interest rate policies even beyond a reductio ad absurdum, with or without the aid of technology.
In considering NIRP, Haldane’s paper fails to address an even greater potential problem, which could easily become cataclysmic. By forcing people into paying to maintain cash and bank deposits, central bankers are playing fast-and-loose with the public’s patient acceptance that state-issued money actually has any value at all. There is a tension between this cavalier macroeconomic attitude and what amounts to a prospective tax on personal liquidity. Furthermore, NIRP makes the hidden tax of monetary inflation, of which the public is generally unaware, suddenly very visible. Already ZIRP has created enormous unfunded pension liabilities in both private and public sectors, by requiring greater levels of capital to fund a given income stream. Savers are generally unaware of this problem. But how do you value pension liabilities with NIRP? Anyone with savings, which is the majority of consumers, is due for a very rude awakening.
We should be in no doubt that increasing public awareness of the true cost to ordinary people of monetary policies, by way of the debate that would be created by the introduction of NIRP, could have very dangerous consequences for the currency. And once alerted, the public will not quickly forget. So not only are the central banks embarking on a course into the unknown, they could also set off uncontrollable price inflation by creating widespread public aversion to maintaining any cash balances at all.
The only reason any particular form of money has exchange value is because people are prepared to exchange goods for it, which is why relative preferences between money and goods give money its value. Normally, people have a range of preferences about a mean, with some preferring money relative to goods more than others and some preferring less. The obvious utility of money means that the balance of these preferences rarely shifts noticeably, except in the event of a threat to a complacent view. For this reason, monetary inflation most of the time does not undermine the status as money of central bank issued currency.
The trouble comes when the balance of these preferences shifts decisively one way or the other. At an extreme, if no one wants to hold a particular form of money, it will quickly become valueless, irrespective of its quantity, just like any other unwanted commodity. This is the logical outcome of negative interest rates, and subsequent increases in interest rates sufficient to stabile the purchasing power of currencies is no longer an option, given the high levels of public and private debt everywhere.
Therefore, we need to watch closely how this debate over NIRP develops. If the Bank of England is looking at ways to overcome the zero bound on a permanent basis, it is a fair bet that it is being looked at by other central banks in private as well. And if NIRP gains traction at the Top Table, the life-expectancy of all fiat currencies could become dramatically shortened.
It appears there is one ‘currency’ worth holding on to when a nation’s fiat fraud is exposed…
Real “wealth” preservation.
Perhaps it is because the world has grown habituated to its unique set of “liquidity” problems, but California’s record, and ongoing, drought has not been receiving much media coverage in recent weeks. Perhaps it should be, because according to a report by CBS Sacramento, the mystery that recently surrounded the water levels at Lake Mead and Lake Powell, has spilled over to a water reservoir in Northern California.
But then reality bit with a sudden realization that a hawkish-er Yellen actually said absolutely nothing different from what she said last week…and they are hanging on by a thread…
The last time we had a closing in stocks on a Friday as ugly as this was Aug 21st (before Black Monday)
Chinese stocks were supported all week (with Xi’s visit to the US) until last night… with SHCOMP roundtripping to unchanged
And while Europe rallied on Yellen and BMW today, it remains notbaly hard hit post-FOMC…
The Biggest News Today was Biotechs and Junk Bonds Bloodbathery…
Biotechs were monkey-hammered this week with a 12% plunge… down 6 days in a row
To Dec 2014 levels – the biggest weekly drop since Aug 2011
As S&P Biotech ETF had its worst day since August 2011…
Biotechs are down 26% from the $91.11 highs on 7/20
Who is to blame? Shrekli’s Greed or Clinton’s Populism
High yields bonds were slammed this week. HYG (The HY Bond ETF) saw its biggest weekly drop since Dec 2014 and closed at its lowest since Nov 2011…
And HYG was in charge of stocks today…
* * *
The exuberance and carnage today was (once again) all about USDJPY… it appears a failed momo ramp past 121.00 around 2pmET was the trigger (along with Biotech accelerating lower)
And Futures show the price action all day long…
Overnight Yellen 0450ET BMW “Allclear” 0830ET GDP Up 0930ET Boehner resignation 1400ET USDJPY/Biotechs fail
Leaving cash indices roundtripping on the day… (Dow helped by NKE’s adding 60-70 points)
And it’s a bloodbath since post-FOMC peak euphoria… Small Caps & Trannies worst…
Financials outperformed today (with a gap open after Yellen’s speech) and Healthcare worst today (and on the week)…
Financials gains today (on Yellen) were entirely ignored by credit markets… how many more times do you buy that hope?
Leaving Nasdaq in the red year-to-Date…
Let’s not forget CAT this week that saw no bounce at all today…
and another hedge fund hotel – SUNE was crushed today and this week as it appears for the 3rd month in a row, month-end liquidations are slamming…
* * *
So with the equity bloodbathery out of the way…
Treasury yields ended the week modestly higher after a big ramp higher this morning (releived a little as bonds rallied on equity weakness this afternoon)…
The USDollar Index gapped up on Yellen’s speech last night but went nowhere after that (even as JPY weakness offset EUR strenght)
Commodities were mixed on the week with Gold and Crude higher, silver modestly lower, and copper clubbed… (not ethe morning shenanigans everyday)
Copper tumbled over 4% on the week – its biggest weekly drop since Nov 2014, closing at its lowest since May 2009…
And Gold broke above its 100-day moving-average again… will it hold this time…
Bonus Chart: The Market is macro-data-dependent… so what data is The Fed imagining?
As we showed earlier, at this point any debate whether or not the S&P500 is driven purely by the “outside money” injected by the Fed, is over: financial markets are now down since the end of QE3, while cash is the only asset that is rising because the Fed is no longer actively debasing the US currency (it will again, but not right now). Feel free to ignore and/or mock any so-called expert who still idiotically argues it is anything but money printing.
But while we know what happened in the past, what everyone wants to know is what will happen, and whether the recent correction will morph into a far more serious bear market (such as the one that just slammed the recently bubbly biotech sector).
Here, according to BofA’s Michael Hartnett, are the key bear market catalysts that everyone should be watching.
1. Peak in liquidity
QE & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash cashes (oil, UST, CHF, bunds, SPX) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.
2. Deflationary recovery
The QE loser that has remained a loser is the bank sector. The banks have underperformed in 2015 because the economy has disappointed and the recovery has remained exceptionally deflationary. The bank recovery in 2013/14 therefore has not been validated by a move higher in bond yields (Chart 4)
3. Manufacturing recession
More recently, investors have witnessed weak manufacturing activity and profits, led most visibly by negative growth in Chinese exports (which partly caused the Chinese devaluation). Investor hopes of a much-awaited handoff from a (storming) liquiditydriven bull market to a (calmer) EPS-driven market have been dashed, and fears of a global manufacturing recession are on the rise.
4. Capitulation of the “strong $” & “TINA” trades
Fear of US/global EPS recession & thus abject “Quantitative Failure” after 601 rate cuts and zero/negative rates and $15trn of asset purchases and a multitude of currency devaluations…have caused a big recent reversal of two of the most stubborn trades of 2015:
The “strong $ trade”…investors have been forced to reduce longs in Europe & Japan The “TINA trade”…investors have been forced to reduce longs in Equities, Discretionary, Tech, Banks).
Indeed, despite the fact that EM/commodities/resources continue to visibly discount a “deflationary bust”, the “longs” revealed in the Sept FMS have actually underperformed the “shorts” (Chart 6) in the recent crash. The “longs” are down 8.0% since Aug 19th, while the “shorts” are down 5.4%.
Pullback in Margin Debt is healthy… unless it signifies the start of a larger decline.
In our post yesterday on household stock investment, we discussed what we call “background indicators”. These various investment metrics describe the longer-term conditions in the marketplace, but are not catalysts themselves. Thus, we consider them to be measures of potential risk should a catalyst come along to trigger a decline. In that case, the potential risk begins to manifest itself in actual risk. Considering it is near its all-time highs, we consider household stock investment to carry significant potential risk. Another background indicator signaling the same is NYSE margin debt.
Margin debt refers to the amount of money borrowed for the purposes of leveraging a stock position. The higher the level of margin debt, the more leverage in the system – and the greater the amount of potential risk. As of April this year, NYSE margin debt was at an all-time high at more than $500 billion. Over the past few months, the level has moderated a bit. After August’s market rout, margin debt sat at $473 billion, down 6.7% from the highs.
So is this a healthy pullback in potential risk? Or is it a beginning of a larger trend whereby more potential risk will become actualized risk? There is no way to know for sure, however, there have been a few similar declines in margin debt in the past 15 years. Specifically, since 1999, NYSE margin debt has seen a drawdown from its high of at least 6.7% on 4 other occasions
April 2000 August 2007 May 2010 August 2011
Obviously the first two instances saw the pullback morph into substantial, longer-term retrenchments, coinciding with cyclical bear markets in stocks. The other two occurrences, while coinciding with painful stock market pullbacks at the time, did not lead to a longer retrenchment in margin debt. And, in fact,by the time we knew what margin debt had done in May 2010 and August 2011, the correction in stocks was almost over.
There are obvious similarities between the 2010 and 2011 instances with our current situation, especially 2011. So it is entirely possible that the current market pullback has almost run its course. However, there are also differences. In 2010 and 2011, neither the stock market nor margin debt were at all-time highs. They were in 2000 and 2007, however.
So which is it? We can’t know but there is one thing that may be relevant to keep in mind. Considering the elevated near-all-time high readings, if it is the beginning of a larger decline in margin debt, the resulting move in margin debt and in stocks will be much larger than that of a mere short-term correction. Thus, while the odds of each outcome may be equal (as far as we know), the consequences of each are much different.
In any bull market, certain excesses are built up during its duration. The build up of these excesses, in metrics like margin debt, can serve as a tremendous tailwind for the market…as long as they continue to rise. However, when the music stops and the market declines, these tailwinds become headwinds. This is particularly true of margin debt as margin selling necessarily exacerbates the damage in a large decline.
We do not know for sure if the recent margin debt retrenchment is the beginning of a longer trend. However, given the record high levels it recently achieved, should a longer, more serious decline in the stock market be starting, the large potential risk represented by record margin debt levels will turn into large actual risk.
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More from Dana Lyons, JLFMI and My401kPro.
How’s that Obamacare working out for you? That’s what I thought.
Considering that pretty much every single thing Obama promised when he was running for President turned out to be an outright lie, we shouldn’t be surprised this is also the case when it comes to his so-called “signature achievement.” Before getting into the meat of this post, let’s take a trip down memory lane and watch a video clip of Obama on the 2008 campaign trail.
As you can see, he didn’t just say it once or twice. He said it over, and over and over again. Now here’s what actually happened.
From Investors Business Daily:
Employer-based health insurance premiums climbed 4.2% this year for family plans, according to an annual Kaiser Family Foundation report. That’s up from 3% the year before.
Since 2008, average family premiums have climbed a total of $4,865.
The White House cheered the news, saying it was a sign of continued slow growth in premium costs.
“We will start,” Obama said back in 2008, “by reducing premiums by as much as $2,500 per family.”
And Obama wasn’t talking about government subsidized insurance or expanding Medicaid or anything like that. He specifically focused on employer provided health care.
For “people who already have insurance, and the employers who are providing it,” he said at one campaign event, “we will work to lower your premiums by up to $2,500 per family.”
“We screwed some folks.”
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For related articles, see:
Over the course of the last several weeks, Europe’s worsening migrant crisis and Russia’s stepped up military support for Bashar al-Assad’s forces at Latakia have conspired to wake the entire world up to Syria’s protracted civil war.
The interesting thing about Russia’s involvement is the extent to which Moscow’s approach to the conflict differs from The Kremlin’s handling of the crisis in Ukraine.
Whereas Putin has steadfastly refused to admit the scope of Russia’s support for the separatists at Donetsk, he’s made no secret of Moscow’s intentions in Syria.
Note the extent to which that assessment differs from Washington’s official line. While the US insists (loudly) that it cannot discern what Russia’s intentions in Syria are, The Kremlin has been remarkably (and uncharacteristically) clear. Put simply, Russia intends to bolster the army of its ally Bashar al-Assad against any and all anti-regime elements operating inside Syria and because some of those anti-regime elements happen to be extremists, Russia is effectively waging a war on terror by default. No mystery there.
However, because the US needs to buy time to figure out the best way to navigate an impossibly complex situation whereby Washington will either need to join its two fiercest foreign policy critics (Russia and Iran) in destroying Syrian rebels that in some cases were trained and supported by the Pentagon or else stand aside as the Russians do in a matter of months what the US air force has failed to achieve over the course of more than a year, The White House pretends to be completely confused about Putin’s intentions. This charade has piqued the public’s interest in Russia’s “mysterious” military buildup.
Having said all of that, one should of course approach any and all “evidence” of Russia’s maneuvers with an appropriate amount of skepticism because, as we noted earlier this month, things like satellite images purporting to show just what Russia is doing and where in Syria “are the modern equivalent of Colin Powell’s vial of WMDs presented to the United Nations in 2003 to justify the war with Iraq.”
It’s with all of the above in mind that we present the latest images that allegedly show the extent to which Russia is preparing for war from Bashar al-Assad’s seaside stronghold.
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