Category Archives: Housing Market

Massive Asset Bubbles And Cheap Gold And Silver

Notwithstanding today’s absurdly phony and propagandistic employment report, it’s becoming more apparent by the week that the Fed and the U.S. Government are once again preparing to print more money. I don’t know when the Fed will revert to more QE but I would argue that the intense effort by the banks to use the Comex as a conduit to control the price of gold is a probable signal – just like in 2008 from March to October. Several FOMC officials have already hinted at the possibility of employing “radical” policy measures to keep the system from falling apart.

Silver Liberties invited on its podcast to discuss the extreme overvaluation of financial “assets” and the extreme undervaluation of real money – gold and silver – and the related derivative of real money – mining stocks.

The Historical Stock Bubble And Undervalued Gold And Silver

When the hedge fund algos inevitably turn the other way and unload stocks, a meaningful amount of the capital that leaves the stock market will likely rush into gold and silver.  The record hedge fund net short position on the Comex will add fuel to the move in gold/silver.

James Anderson of Silver Doctors/SD Bullion invited me to discuss the largest stock bubble in U.S. history and why gold is extremely undervalued relative to the U.S. dollar.  (Note:  at the 20:44 mark I reference China’s foreign reserves to be $1.2 trillion. This is the dollar amount of China’s reserves; China’s total foreign reserve is $3 trillion).

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Divergence Between Stocks And Reality Is Insane

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

This is the nastiest bear market rally that I have seen in my over 34 years of experience as a  financial markets professional. It would be a mistake to make the assumption that there has  not been some official intervention to help the stock market recover from the December sell-off.

Rob Kientz of goldsilverpros.com – a relatively new website that focuses on gold and silver market news and research – and I had a conversation about the extreme negative divergence between the economy and the stock market. And, of course, we discussed gold, silver and mining stocks:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

Larry Kudlow Wants A 50 b.p. Cut In Fed Funds – Why?

The stock market has been rising relentlessly since Christmas, riding on a crest of increasingly bearish economic reports. Maybe the hedge fund algos are anticipating that the Fed will soon start cutting rates. Data indicates foreigners and retail investors are pulling cash from U.S. stocks. This for me implies that the market is being pushed higher by hedge fund computer algos reacting to any bullish words that appear in news headlines. For example, this week Trump and Kudlow have opportunistically dropped “optimistic” reports connected to trade war negotiations which trigger an instantaneous spike up in stock futures.

“U.S. economy continues to weaken more sharply and quickly than widely acknowledged” – John Williams, Shadowstats.com, Bulletin Endition #5

The real economy continues to deteriorate, both globally and in the U.S. At some point the stock market is going to “catch down” to this reality.

The graphic above shows Citigroup’s Economic Data Change index. It measures data releases relative to their 1-yr history. A positive reading means data releases have been stronger than their year average. A negative reading means data releases have been worse than their 1-yr average. The index has been negative since the spring of 2018 and is currently well south of -200, its worst level since 2009.

The Treasury yield curve inversion continued to steepen last week. It blows my mind that mainstream media and Wall Street analysts continue to advise that it’s different this time. I would advise heeding the message in this chart:

I’m not sure how any analyst who expects to be taken seriously can look at the graphic above and try to explain that an inverted yield curve this time around is irrelevant. As you can see, the last two times the Treasury curve inverted to an extreme degree, the stock bubbles began to collapse shortly thereafter.

The data in the chart above is two weeks old. The current inversion is now nearly as extreme as the previous two extreme inversions. This is not to suggest that the stock market will go off the cliff next week. There’s typically a time-lag between when the yield curve inverts and when the stock market reacts to the reality reflected in an inverted curve. Prior to the great financial crisis, the yield curve began to invert in the summer of 2006. However, before the tech bubble popped, the yield curve inversion coincided with the crash in the Nasdaq.

Another chart that I believe reflects some of the information conveyed by the inverted yield curve is this graphic from the Fed showing personal interest payments. Just like in 2000 and 2008, households once again have taken on an unmanageable level of debt service expense:

Obviously the chart above is highly correlated with stock market tops…

The Conference Board’s measure of consumer confidence dropped in March, with the Present Situation index plunging to an 11-month low. It was the biggest monthly drop in the Present Situation index since April 2008. What’s interesting about this drop in confidence is that, historically, there’s been an extraordinarily high correlation between the directional movement in the S&P 500 and consumer confidence. The move in the stock market over the last three months would have suggested that consumer confidence should be soaring.

The Cass Freight Index for February declined for the third straight month. Even the perma-bullish publishers of the Cass newsletter expressed that the index “is beginning to give us cause for concern.” The chart of the index has literally fallen off a cliff. Meanwhile, the cost of shipping continues to rise. So much for the “no inflation” narrative. The Cass Index is, in general, considered a useful economic indicator. Perhaps this is why Kudlow wants an immediate cut in the Fed Funds rate?

Recession Fears Fading? ROFLMAO

The news headlines explained the sudden jump in the S&P futures this morning by stating that “recession fears had faded.”  Just like that. Overnight.  I guess the fact that the housing starts report showed a 9% sequential drop in housing starts last month and and a year-over-year 10% plunge means that the housing market is no longer considered part of the economy.

That report was followed by a highly negative March consumer confidence report which included that largest drop in the “present situation” index since 2008.  What’s stunning about this report is that consumer confidence usually is highly correlated with the directional movement of the S&P 500. Obviously this would have suggested that consumer confidence should be soaring.

I explained to my Short Seller Journal subscribers that, once it became obvious the Fed would eventually have to start cutting rates and resuming QE, the stock market might sell-off. I think that’s what we saw on Friday. The “tell-tale” is the inversion in the Treasury yield curve. It’s now inverted out to 7 years when measured between the 1-yr and 7-yr rate. On Friday early the spread between the 3-month T-Bill and the 10-yr Treasury yield inverted. This has occurred on six occasions over the last 50 years. Each time an “officially declared” recession followed lasting an average of 311 days.

The yield curve inversion is a very powerful signal that economy is in far worse shape than any Fed or Government official is willing to admit. the Treasury yield curve “discounts” economic growth expectations. An upward sloping yield curve is the sign that the bond market expects healthy economic growth and potential price inflation. An inverted curve is just the opposite. If you hear or read any analysis that “it’s different this time,” please ignore it. It’s not different.

The inverted yield curve is broadcasting a recession. For many households, this country has been in a recession since 2008. That’s why debt levels have soared as easy access to credit has enabled 80% of American households to maintain their standard of living. The yield curve is telling us that credit availability will tighten considerably and the recession will hit the rest of us. This is what Friday’s stock market was about, notwithstanding the overtly obvious intervention to keep the S&P 500 above the 2800 level on Monday and today.

Without a doubt, through the “magic” of “seasonal adjustments” imposed on monthly data we might get some statistically generated economic reports which will be construed by the propagandists as showing “green shoots.” Run, run as far away as possible from this analysis. The average household has debt bulging from every orifice. In fact, the entire U.S. economic system is bursting at the seams from an 8-year debt binge. It’s not a question of “if” the economy will collapse, it’s more a matter of “when.”

The U.S. Economy Is In Big Trouble

“You’ve really seen the limits of monetary and fiscal policy in its ability to extend out a long boom period.” – Josh Friedman, Co-Chairman of Canyon Partners (a “deep value,” credit-driven hedge fund)

The Fed’s abrupt policy reversal says it all. No more rate hikes (yes, one is “scheduled” for 2020 but that’s fake news) and the balance sheet run-off is being “tapered” but will stop in September. Do not be surprised if it ends sooner. Listening to Powell explain the decision or reading the statement released is a waste of time. The truth is reflected in the deed. The motive is an attempt to prevent the onset economic and financial chaos. It’s really as simple as that. See Occam’s Razor if you need an explanation.

As the market began to sell-off in March, the Fed’s FOMC foot soldiers began to discuss further easing of monetary policy and hinted at the possibility, if necessary, of introducing “radical” monetary policies. This references Bernanke’s speech ahead of the roll-out QE1. Before QE1 was implemented, Bernanke said that it was meant to be a temporary solution to an extreme crisis. Eight-and-a-half years and $4.5 trillion later, the Fed is going to end its balance sheet reduction program after little more than a 10% reversal of QE and it’s hinting at re-starting QE. Make no mistake, the 60 Minutes propaganda hit-job was a thinly veiled effort to prop up the stock market and instill confidence in the Fed’s policies.

Economic data is showing further negative divergence from the rally in the stock market. The Census Bureau finally released January new home sales, which showed a 6.9% drop from December. Remember, the data behind the report is seasonally adjusted and converted to an annualized rate. This theoretically removes the seasonal effects of lower home sales in December and January. The Census Bureau (questionably) revised December’s sales up to 652k SAAR from 621k SAAR. But January’s SAAR was still 2.3% below the original number reported. New home sales are tanking despite the fact that median sales price was 3.7% below January 2018 and inventory soared 18%.

LGI Homes reported that in January it deliveries declined year-over-year (and sequentially) and Toll Brothers reported a shocking 24% in new orders. None of the homebuilders are willing to give forward guidance.  LGI’s average sale price is well below $200k, so “affordability” and “supply” are not the problem (it’s the economy, stupid).

The upward revision to December’s new home sales report is questionable because it does not fit the mortgage purchase application data as reported in December. New homes sales are recorded when a contract is signed. 90% of all new construction homes are purchased with a mortgage. If purchase applications are dropping, it is 99% certain that new home sales are dropping. With the November number revised down 599k, and mortgage purchase applications falling almost every week in December, it’s 99% likely that new home sales at best were flat from November to December. In other words, the original Census Bureau guesstimate was probably closer to the truth.

The chart to the right shows the year-over-year change in the number of new homes (yr/yr change in the number of units as estimated by the Census Bureau) sold for each month. I added the downward sloping trend channel to help illustrate the general decline in new home sales. As you can see, the trend began declining in early 2015.

Recall that it was in January 2015 that Fannie Mae and Feddie Mac began reducing the qualification requirements for Government-backed “conforming” mortgages, starting with reducing the down payment requirement from 5% to 3%. For the next three years, the Government continued to lower this bar to expand the pool of potential homebuyers and reduce the monthly payment burden. This was on top of the Fed artificially taking interest rates down to all-time lows. In other words, the powers that be connected to the housing market and the policy-makers at the Fed and the Government knew that the housing market was growing weak and have gone to great lengths in an attempt to defer a housing market disaster. Short of making 0% down payments a standard feature of Government-guaranteed mortgage programs, I’m not sure what else can be done help put homebuyers into homes they can’t afford.

I do expect, at the very least, that we might see a “statistical” bounce in the numbers to show up over the couple of existing and new home sale reports (starting with February’s numbers). Both the NAR and the Government will likely “stretch” seasonal adjustments imposed on the data to squeeze out reports which show gains plus it looks like purchase mortgage applications may have bounced a bit in February and March, though the data was “choppy” (i.e. positive one week and negative the next).

E-commerce sales for Q4 reported last week showed a 2% annualized growth rate, down from 2.6% in Q3. Q3 was revised lower from the 3.1% originally reported. This partially explains why South Korea’s exports were down 19.1% last month, German industrial production was down 3.3%, China auto sales tanked 15% and Japan’s tool orders plummeted 29.3%. The global economy is at its weakest since the financial crisis.

It would be a mistake to believe that the U.S. is not contributing to this. The Empire State manufacturing survey index fell to 3.7 in March from 8.8 in February. Wall Street’s finest were looking for an index reading of 10. New orders are their weakest since May 2017. Like the Philly Fed survey index, this index has been in general downtrend since mid-2017. The downward slope of the trendline steepened starting around June 2018. Industrial production for February was said to have nudged up 0.1% from January. But this was attributable to a weather-related boost for utilities. The manufacturing index fell 0.4%. Wall Street was thinking both indices would rise 0.4%. Oops.

The economy is over-leveraged with debt at every level to an extreme and the Fed knows it. Economic activity is beginning  to head off of a cliff. The Fed knows that too. The Fed has access to much more in-depth, thorough and accurate data than is made available to the public. While it’s not obvious from its public posture, the Fed knows the system is in trouble. The Fed’s abrupt policy reversal is an act of admission. I would say the odds that the Fed starts printing money again before the end of 2019 is better than 50/50 now. The “smartest” money is moving quickly into cash. Corporate insiders are unloading shares at a record pace. It’s better to look stupid now than to be one a bagholder later.

FOMC Statement: Reading Between The Lines

“No more rate hikes period…rate cuts to begin sometime this spring…tapering the balance sheet taper starting in May…QT ends in September even though our balance sheet has only been reduced by roughly 10% of the amount of money we printed…Quantitative Easing  aka “money printing” to resume in October…our hidden dot plot shows that you should buy as much physical gold as you can afford and keep it as far away from any custodial safekeeping as possible.”

Just for the record, the Fed’s “Dot Plot” has to be one of the most idiotic props ever created for public consumption. It far exceeds the absurdity of the “flip chart” that Steve Liesman uses.

A Debt-Riddled System That Is Hitting The Wall

An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically. – Robert Kaplan, President of the Dallas Fed

Fed officials always understate risks embedded in the system. Translated, the statement above implies the Fed is worried about the amount of debt accumulated in the U.S. economic system over the last 8 years. Kaplan specifically referenced the $6.2 trillion in corporate debt outstanding as a reason for the Fed to stop raising the Fed funds rate. Non-financial corporate debt as a percentage of GDP is now at a record high:

More eye-raising for me was the warning issued by the BIS (Bank for International Settlements – the global Central Bank for central banks). The BIS warned that the surging supply of corporate debt, specifically the amount of BBB-rated debt, has left the credit market vulnerable to a crash once the economic weakness triggers ratings downgrades. A large scale ratings downgrade of triple-B issuers to junk would cause an avalanche of selling from funds which can’t hold non-investment grade debt. This has the potential to seize-up the credit markets.

The BIS would not issue a warning like this unless it was already seeing troubling developments in the numbers to which it has access. Recall that leveraged loan ETFs plunged in value the last two months of 2018. Same with high yield bond ETFs, though the drop in leveraged bank loans was more troubling given their status as senior secured and ahead of junk bonds in the legal pecking order.

As you can see from the chart below, it looks like the value of senior leveraged bank loans may be headed south again:

Just like the stock market, fixed income prices rallied sharply after the Fed and the Trump Government acted to arrest the sell-off in the stock market in late December. But this was always a short-term “fix,” as economic fundamentals continued to deteriorate, perhaps at a hastened pace because of the Government shutdown. But neither the shut-down nor the trade war are the causes of the collapsing global economy.

More evidence the consumer is tapped out – Deutsche Bank wrote a report detailing signs that the average U.S. household is running up against its willingness and ability to assume more debt and monthly interest expense. I have been suggesting this was the case for a few months in SSJ. One indicator I thought was interesting is a chart showing that the average hours worked in sectors selling “big ticket” items is now declining (home furnishings, travel arrangement and reservation services and used car dealers).

Another chart showed that, based on regional Fed surveys of senior loan officers at banks, demand for credit cards, auto loans and personal loans is declining:

One of the reasons for the drop in loans is simply that the average consumer simply can not afford the monthly cost of taking on additional debt, especially higher-cost credit card and auto debtl. Just as significant is the fact that interest rates on these types of loans are rising quickly – i.e. the average credit card interest rate is now 17% vs 14% a year ago. Deutsche Bank omits to explain why the interest rate on these types of loans is rising much faster than the Fed funds.

The interest rate charged on a loan reflects the “risk free” rate (Fed funds), the time value of money and – most important – the inherent risk associated with specific types of loans. Interest rates on credit cards and auto loans are rising to reflect the increased risk attached to these forms of credit – i.e. the rising delinquency and default rates.

Besides the rising cost of necessities, the average household is getting squeezed from higher interest payments on the record amount of household debt that has accumulated over the last 10 years. The chart below shows the year-over-year growth in household interest payments going back the 1960’s:

The aggregate household interest payment has soared at a 15% Y/Y rate. Interest payments as a share of total household spending have jumped to the highest level since the financial crisis. Virtually every prior time when interest payments spiked this much, a recession promptly followed.

Last but not least, as Treasury debt hits a new record every day, it was reported by the Treasury that the U.S. budget surplus in January, traditionally one of the only months of the year with a spending surplus because of tax receipt timing, was only $9 billion. This missed the consensus estimate of $25 billion and was far below the January 2018 surplus of $49 million. For the first 4 months of the Government’s fiscal year, the budget deficit was $310 billion, 77% higher than the $175.7 billion deficit for the same period last year.

The budget deficit will surely be much higher than the $1.2 trillion annualized rate recorded in the first four months of this FY. Federal interest expense hit a record high for the four-month period. Annualized, the projected $575 billion interest expense alone for FY 2019 would be more than the entire budget deficit in FY 2014.

Finally, the Deutsche Bank report showed two graphics showing the “current conditions” index for buying cars and homes for the top 33% of households by income. The index measures the intent to make a purchase. The current conditions index for car purchases was at its lowest since 2012. For home buying, the intent to purchase index was at its lowest since 2008.

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The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information

Trump’s Trade War Tweets, Buybacks And A Short-Squeeze

Someone last week suggested that Trump sees the stock market as the barometer measuring the success of his Presidency. I think his behavior, tweets, press comments, etc with respect to the stock market validates that assertion.

The Dow trended lower all week last after Monday’s close. Whenever the stock market faded from an early run-up or began a rapid sell-off, a Trump tweet or press statement would pop up proclaiming that the trade war negotiations were “progressing.” It seems, though, this manipulation tonic is starting to lose strength. The index of stocks with large buyback programs actually finished the week lower. But the “most shorted” stock index closed higher on the week again. This is why the SPX, Naz and Russell outperformed the Dow this past week.

Market tops are a process – While I’m getting impatient for this market to rollover, market tops are a process. This chart certainly provides something to contemplate:

The chart above overlays the SPX from April 2018 to present on top of a chart of the SPX over a similar period in 1936-1937. The correlation is surprisingly high up to this point. No one can predict if the SPX will follow the same path for the rest of 2019 that it took in 1937, but the two periods of time have many economic, financial and geopolitical similarities. There’s certainly a case to be made that the current stock market might unfold in a manner that “rhymes” with the large decline that occurred in 1937.

Another interesting indicator is the AAII Sentiment Survey. The AAII is the American Association of Individual Investors. The weekly survey measures the relative bullishness and bearishness of individual investors. Retail investor sentiment is considered a fairly reliable contrary indicator. Currently the bullishness is now over the 40% level and the bearish level is 20% (the rest are “neutral”) – a level of bullishness that has signaled a market top in the past. In contrast, a bullish level of 20% and a bearish level of 49% on December 13th was registered nine days before the stock market bottomed.

The highest the bullish sentiment level has reached in the last 5 months was 45% in the first week of October (25% bearish). The stock market entered a big decline on October 3rd. In isolation, this indicator may or may not be reliable. But given the number of other indicators associated with a market top, now would be a good time to take profits on any long positions you might have put on in the last 2 months. Given the deteriorating fundamentals of the economic and financial system, the probability that the market will rise a meaningful amount from here is quite low.

The “US Macro” index measures the difference between consensus expectation vs the actual number reported for a wide array of economic reports. As you can see, the stock market has dislocated from economic reality by a substantial margin. At some point, unless the economic reports begin to improve, the stock market will “catch down” to reality. How long it will take for this to occur is anyone’s guess, but it is likely that the “adjustment” will be abrupt.

Many indicators are reflecting a sharp fall-off in consumer demand. Wholesale inventories are soaring and the inventory to sales ratio is significantly higher than a year ago. The CEO of a logistics warehouse in California remarked in reference to the inventory stored in company warehouses, “in 30 years I’ve never seen anything like this.” This includes inventories of durables and non-durables targeted for domestic distribution.

Confirming the pile-up in manufactured goods relative to demand, the Cass Freight index has declined on a year-over-year basis two months in a row. The index had been rising each on month on an annual comparison basis since Trump took office.

Consumer sentiment is also falling. The latest U of Michigan consumer sentiment survey fell well below the Wall St consensus expectation, with some components falling to their lowest level since the 2016 election (recall that hope soared after the election). Apologists are blaming the trade war and the Government shutdown. However, historically there’s a near-100% correlation between the directional movement of the stock market and consumer sentiment. Any negative effect from the shutdown should have been offset by the sharp rally in the stock market. Contrary to the obligatory positive spin put on the data, the sentiment index likely reflects the fact that the average household has largely tapped out its ability to take on more debt in order to keep spending on anything above non-discretionary items.

Insider selling during February has accelerated. Insiders sold more shares in the first half of February relative to shares purchased than at any time in the last 10 years. The size and volume of insider stock sales the last three days of February – per SEC filings – was described by one analyst as “off the charts.” The Financial Times had an article discussing the fact that America’s CEOs are leaving their posts at the highest rate since 2008. It’s likely the departures reflect a bearish outlook by insiders both for business conditions and the stock market.

Homebuilders, despite the small rise in homebuilder optimism, must be sensing the fall-off in the economy and a decline the pool of potential new homebuyers. Housing starts in December dropped 11.2% from November. The decline would have been worse but November’s number was revised lower. The number reported for December was 14.4% below the consensus estimate. The numbers are SAAR (seasonally adjusted annualized rate) in case you were wondering about seasonality between November and December. But just to confirm, the December 2018 number was 11% below December 2017. Also, the Census Bureau releases the “unadjusted” monthly numbers, which showed a 12% drop in starts year-over-year.

Over the next several weeks there will be a lot of excuses for the deteriorating economic fundamentals:  trade war, Government shut-down, cold weather in January and February, low inventory in low-price homes, the dog ate my homework.

But the truth is that the average household in the U.S. is running up against debt limitations – the ability to take on and service additional debt.  Just one indicator of this is rising credit card and auto loan delinquencies.  The U.S. economy for the last 8 years has been primed and pump with printed money and debt.  Debt at every level of the system is at all time higher – both nominally and as a percentage of GDP.

The next round of QE, regardless of the scale, will do nothing to re-stimulate economic activity unless the money is used to re-set (i.e. pay-off) creditors on behalf of the debtors. This was how the last reset was engineered after the financial crisis but this time it will have to be a bailout in size that is multiples of the last one.

The stock market is beginning to rollover again, as the gravity of economic fundamentals begins to exert its “pull.”  I’m sure it won’t take long before we start to hear complaints about the hedge fund computer algos again.  But the best advice is to take your money off the table and get out of the way.