Category Archives: U.S. Economy

Get Ready To Party Like It’s 2008

Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress didn’t pass a tax reform Bill.  His reason is that the stock market surge since the election was based on the hopes of a big tax cut.  This reminded me of 2008, when then-Treasury Secretary, former Goldman Sachs CEO, Henry Paulson, and Fed Chairman, Ben Bernanke, paraded in front of Congress and threatened a complete systemic collapse if Congress didn’t authorize an $800 billion bailout of the biggest banks.

The U.S. financial system is experiencing an asset “bubble” that is unprecedented in history. This is a bubble that has been fueled by an unprecedented amount of Central Bank money printing and credit creation. As you are well aware, the Fed printed more than $4 trillion dollars of currency that was used to buy Treasury bonds and mortgage securities. But it has also enabled an unprecedented amount of credit creation. This credit availability has further fueled the rampant inflation in asset prices – specifically stocks, bonds and housing, the price of which now exceeds the levels seen in 2008 right before the great financial crisis.

However, you might not be aware that western Central Banks outside of the U.S. continue printing money that is being used to buy stocks and risky bonds. The Bank of Japan now owns more than 75% of that nation’s stock ETFs. The Swiss National Bank holds over $80 billion worth of U.S. stocks, $17 billion of which were purchased in 2017. The European Central Bank, in addition to buying member country sovereign-issued debt is now buying corporate bonds, some of which are non-investment grade.

The table to the right shows the YTD performance of the US dollar vs. major currencies and of the gold price vs major currencies. The dollar has appreciated in value YTD vs. alternative fiat currencies. More than anything, this represents the false sense of “hope” that was engendered by the election of Trump. As you can see from the right side of the table, gold is also up YTD vs every major currency. Note that gold has appreciated the most vs. the U.S. dollar. The performance of gold vs. fiat currencies reflects the fact that Central Banks globally are devaluing their currencies by printing currency and sovereign debt in increasing quantities. The rise vs. the dollar also reflects the expectation that, at some point, the Fed and the Treasury will be printing even more currency and Treasury debt at some point in the next 6-12 months. This is despite the posturing by the Fed about “reducing” the size of its balance sheet, which is nothing more than scripted rhetoric.

“We have the worst revival of an economy since the Great Depression. And believe me: we’re in a bubble right now.” Donald Trump, from a Presidential campaign speech

Margin debt is at a record high. At $551 billion, it’s double the amount of margin debt outstanding at the peak of the tech bubble in 2000. It’s 45% greater than the amount of margin debt outstanding at the peak of the 2007 bubble.

Stock investors and house-flippers in the U.S. now make investment decisions based on the premise that, no matter what fundamental development or new event occurs, the market will always go up. “It’s different this time” has crept back into the rationale. The markets are particularly dangerous now. The concept of “risk” has been completely removed from investment equation.

This dynamic is the direct result of the money printing and credit creation which has enabled the Fed to keep interest rates near zero. The law economics tells us that increasing the supply of “good” without a corresponding increase in demand for that good results in a falling price. This is why interest rates are near zero. The Fed and the Government have increased the supply of currency via printing and issuing credit. Investors have, in turn, are taking that near-zero cost of currency and credit and throwing it recklessly in all assets, but specifically stocks and homes.

Currently, anyone who puts their money into the stock, bond and housing markets in search of making money is doing nothing other than gambling recklessly on the certainty of the outcome of two highly inter-related events: 1) the willingness of Central Banks to continue pushing the price of assets higher with printed money; 2) the continued participation of investors who are willing to pay more than the previous investor to make the same bet. Most asset-price chasing buyers have no idea that they are doing nothing more than sitting at a giant casino table game.

The current bubble has been created by a record level of money printing and debt creation globally. Unfortunately, the upward velocity of rising asset prices has seduced investors to recklessly abandon all notion of risk. Based on several studies on investor cash holdings as a percentage of their overall portfolio (cash on the sidelines), investors are “all-in.” One would have to be brain-dead to not acknowledge that global Central Bank money-printing has caused the current “everything” asset bubble. But it’s a “fear of missing out” that has driven investors to pile blindly into stocks with zero regard for fundamental value. Even pensions funds, according to someone I know who works at a pension fund, have pushed equity allocations to the limit.

For the most part, Central Banks are now posturing as if they are going to stop printing money and, in some cases, “shrink” the size of their balance sheet (i.e. reverse “quantitative easing”). To the extent that the first chart above (SPX futures) reflects a combination of Central Bank money printing and investors going “all-in” on stocks (record low cash levels), IF the Central Banks simply stop printing money and do not shrink their balance sheets who will be left to buy stocks when the selling begins?

Largest Asset Bubble In History – It’s Not Different This Time

The current asset bubble has been created by a record level of money printing and debt creation globally. Unfortunately, the upward velocity of rising asset prices has seduced investors to recklessly abandon all notion of risk. One would have to be brain-dead to not acknowledge that global Central Bank money-printing has caused the current “everything” asset bubble. Current data that tracks the cash and investment allocation levels shows that investors – and this includes hedge funds and pensions, not just retail/high net worth – are “all in.” IF the Central Banks simply stop printing money and do not shrink their balance sheets who will be left to buy stocks when the selling begins?

Silver Doctors invited me onto their weekly money/metals podcast to discuss why the catalysts driving fiat-currency-based paper assets to historical valuations will unwind and will ultimately drive gold to a valuation level higher by several multiples than the current price. Eventually gold will not be measured in terms of dollars and possibly not in terms of any fiat currency:

If you want to find out more about my investment newsletters, click on either of these links:    Mining Stock JournalShort Seller’s Journal.

Is The World About To Take A “Gold Shower?”

The 1944 Bretton Woods international monetary system as it has developed to the present is become, honestly said, the greatest hindrance to world peace and prosperity. Now China, increasingly backed by Russia—the two great Eurasian nations—are taking decisive steps to create a very viable alternative to the tyranny of the US dollar over the world trade and finance. Wall Street and Washington are not amused, but they are powerless to stop it…Now, ironically, two of the foreign economies that allowed the dollar an artificial life extension beyond 1989—Russia and China—are carefully unveiling that most feared alternative, a viable, gold-backed international currency and potentially, several similar currencies that can displace the unjust hegemonic role of the dollar today.

The above is an excerpt from William Engdahl’s essay, “Gold, Oil, Dollars, Russia and China.” The essay is a must-read if you want to understand how the dollar was cleverly forced on the world as the reserve currency and how it is about to be cleverly removed and replaced with a trade system that reintroduces gold into the global monetary system.

Unfortunately, the U.S. educational system presents a fraudulent account of world financial and economic history from Bretton Woods to present.  Fed on a steady educational diet of U.S. propaganda, anyone raised and educated in the U.S. will wake up one day to an economic cold shower and eventual poverty unless they’ve taken the steps necessary to protect their savings (if they have any).

Let’s face it, the entire western monetary system is basically a fraud. It is privately made and privately owned, with the entire international payment system being controlled by the FED – which is totally privately owned – and the BIS (Bank for International Settlement, in Basle, Switzerland – also called the central bank of centrals banks).from an interview with Peter Koenig, geopolitical analyst and a former staff-member of the World Bank

Without a doubt, the Russia-China led BRICS axis is working toward a “reset” of the U.S.-centric dollar reserve global currency system: “Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

That quote was delivered by Putin at the annual BRICS summit in Xiamen, China.  I don’t know how Putin could have more plainly, yet diplomatically,  laid out the inevitable demise of the dollar’s status as the world’s sole reserve currency.

The news report from the Nikkei Asian Review of a gold-backed yuan oil futures contract to be traded in Shanghai was treated with predictable skepticism from the those who require an event to have already occurred in order to “see it.”

That report surfaced shortly after the BRICS summit in China.  I suspect China intentionally has made the world aware of its plan to roll out this contract eventually well ahead of the actual event.  China is imminently launching a yuan-denominated crude oil contract on the Shanghai Futures Exchange.  Please note, for anyone skeptical of this event, that  the announcement came from the vice chairman of the China Securities Regulatory Commission.  I suspect that once this contract is trading smoothly with a high level of liquidity, the next logical step would be to enable the users of this contract  to convert the yuan received for oil into gold.  The gold-backing would be an incentive “sweetener” to use this contract instead of dollar-settled futures contracts.

A gold-backed, yuan-denominated oil futures contract makes sense certainly from the perspective that Russia and China are already settling Russian energy sales to China in yuan.  They have also set up a mechanism by which Russia can convert the yuan received into gold.  Furthermore, the Central Banks of Russia and China combined, are  by far, the two largest buyers of gold in the world.  Why else would Russia/China accumulate a massive Central Bank gold reserve other than to eventually reintroduce gold as a currency stabilizer and a trade settlement “equalizer”  into the global monetary ?

Introduction of an oil futures contract traded in Shanghai in Yuan, which recently gained membership in the select IMF SDR group of currencies, oil futures especially when convertible into gold, could change the geopolitical balance of power dramatically away from the Atlantic world to Eurasia. – William Engdahl, ibid.

The consequences for America as a whole will be catastrophic. Currently the parabolic issuance of U.S. Treasury debt is funded primarily by a recycling of dollars used to settle the majority of global oil trades. Once a dollar-alternative for settling oil trades is established, the amount of dollars available to finance U.S. debt-fueled consumption will rapidly decline. But it’s the ability of the U.S. to issue debt unfettered right now that keeps the U.S. economic system from collapsing. The Fed’s printing press will be the only alternative to immediate collapse. History has shown us what the end of that pathway looks like. It’s far worse than waking up and stepping into an ice-cold shower.

The Daily Coin has published a fascinating interview with William Engdahl:   Gold, China and The Deep State.

The Housing Market Has Stalled

The housing market headed for very “rough waters.” The title is from the National Association of Realtor’s Pending Home Sales report for August in reference to NAR chief “economist” Larry Yun’s commentary on the housing market. Pending homes sales in August, which are based on contracts signed, dropped 2.6% from August. They’re also 2.6% below a year ago August. These are SAAR numbers. The “not seasonally adjusted” numbers were worse, down nearly 4% from August and 3.1% lower than last August.

Once again Yun is blaming the problem on supply. I torpedoed that assertion with facts in last week’s Short Seller’s Journal.  Although, there is indeed a “supply” issue in one regard: there’s a shortage of end user buyers who are required to use, and qualify for the use of, the Government’s de facto subprime mortgage program (as I detailed last week). There’s also a shortage of existing home owners in the mid-price range who can afford to move-up. So yes, in that sense there’s a shortage – it’s just not in homes.

DR Horton (the largest homebuilder in the country) is carrying about the same amount of inventory now as it was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. The point here is that there are plenty of newly built homes available for purchase. Per the Census Bureau, the median sales price of a new home in August was $300k, while the average price was $368k. DH Horton is an averaged price homebuilder.

Per DH Horton’s inventory numbers, there is not a shortage of inventory around the average priced newly built home. Again, there’s a shortage buyers available who can qualify for the debt required to buy one of those homes. This is why the Government has significantly loosened mortgage standards every year since 2014 (see the graphic below). Up against the wall again, I don’t know if the Government will again further loosen the Fannie/Freddie mortgage requirements. If it does nothing, which would be the sensible decision, the housing market is going to sustain a rapid downward price “adjustment.”

Housing stocks are in a mini “melt-up” though it’s somewhat subdued relative to the melt-up in semiconductor stocks. This is despite the threat of rising interest rates and rapidly deteriorating demand-side fundamentals. This is the signal that the end is near for these stocks. Ironically, the University of Michigan consumer confidence survey for September released Friday showed that consumers who judge the current home-buying conditions as favorable plunged to a 5-yr low. This is notwithstanding the easiest mortgage approval standards in over two years:

The graphic above shows consumer perception of homebuying conditions on the left and the latest Fannie Mae lender survey on credit standards on the right. As you can see, the credit standards are the easiest in at least 2-years. Note:  The Fannie survey only dates back to Q3 2015. I would bet good money that the current credit conditions are the easiest since right before the previous housing bubble popped in 2008.

I’ve been discussing and detailing, the alleged “supply issue” affecting home sales is, in fact, a demand-driven issue. This graphic illustrates this:

The graph above is also from Fannie Mae’s latest housing market survey. As you can see, the demand for GSE (Fannie/Freddie/FHA) purchase mortgages has plunged since Q3 2016. The demand for non-GSE and Ginnie Mae purchase mortgages has also declined significantly since Q3 2016.

There’s an online MLS home-listing site called REColorado. I’m signed up to get listing and price-change alerts as they occur in several difference zip codes the represent the areas in metro-Denver that have been hottest. Colorado has experienced a massive inflow of people from all over country, especially California, which has made the Denver area one of the hottest housing markets since 2012, when the State fully legalized marijuana. Since mid-summer, I’ve been “price-change” alerts on homes over $700k on a daily basis. As I write this, I just received two more today. One of the homes started at $1.8 million in September and has taken the price down 11% over three price drops. The other house has an asking price of $779k but has been reduced more than 8% in four price reductions since June. If this is happening in metro-Denver, it’s happening in most formerly “hot” areas. Yes, there will be a few areas around the country that remain “hot” for awhile (like SoCal), but those areas will eventually suffer the most just like in 2008.

I want to reiterate that the housing market is a great short here. The only explanation for the move in the homebuilder stocks this past week is that it’s a momentum-driven technical run. The stocks I’ve been presenting in the last several issues will be lower this time next year. Probably a lot lower. Redfin (RDFN), the online real estate brokerage that I presented last week, closed Friday down $2.88 (10.3%) from the previous Friday. It’s going lower. It’s a good bet that this stock will be trading at or below $20 by Christmas. Zillow Group (ZG) is down 20% since a re-recommended shorting it in the June 25th SSJ issue at $50.69. I will say that I did not expect that to be close to ZG’s all-time high it was an obvious short to me at that point. Companies that earn commissions and fees directly from (RDFN) or related to (ZG) home sales volume will be the leading indicators.

The above analysis and commentary is from the latest issue of the Short Seller’s Journal.  You can out more about subscribing to this weekly investment newsletter here:  Short Seller’s Journal subscription info.  Despite the major indices hitting new all-time highs everyday now, there are many stocks that are declining.  The perfect example is Zillow Group, which I recommended shorting at $50 in June .  It is currently down 18% (an 18% gain if you are short, more if you bought the puts I recommended).  Subscribers also get 50% off the price of subscribing to the Mining Stock Journal.

Former FOMC Member Admits The Fed Manipulates Asset Prices

The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word. – Former FOMC member, Kevin Warsh – The Fed Needs New Thinking

Please note, a large portion of the source links, plus the idea for this commentary, were sourced from GATA’s latest dispatch regarding the possible appointment of Warsh as the next Fed Chairman.

The quote above is from former FOMC board member,  Kevin Warsh, who appears to be Trump’s top candidate to assume the Fed’s mantle of manipulation from Janet Yellen.   By way of relevant reference, Warsh happens to be the son-in-law of Ronald Lauder,  who is a good friend of Trump’s.  He is also a former Steering Committee member of the Bilderberg Group.    GATA has published a summary reprise of direct evidence from previous written admissions by Warsh the the Fed actively manages financial asset prices, “including bolstering the share price of public companies” (from link above).

In addition to stocks, Warsh admitted in the same essay that, “The Fed seeks to fix interest rates and control foreign-exchange rates simultaneously” (same link above). This task is impossible without suppressing the price of gold, something which began in earnest in 1974 when, under the direction of then Secretary of State, Henry Kissinger, paper gold futures contracts were introduced to the U.S. capital markets. This memo, written by the Deputy assistant Secretary of State for International Finance and Development, was sent to Kissinger and Paul Volcker in March 1974: Gold and the Monetary System:  Potential U.S.-EC Conflict (note:  the source-link is from GATA – it was discovered in the State Department archives by Goldmoney’s John Butler).

The nature of discussions after that memo, the minutes of which are now publicly available, center around the fact that several European Governments were interested in re-introducing gold into the global monetary system.  This movement was in direct conflict with the interests of U.S. elitists and banking aristocrats, as U.S. had successfully established  the petro-dollar as the reserve currency.

In 2009 GATA sent a Freedom Of Information Act request to the Fed in an attempt to get access to documents involving the Fed’s use of gold swaps (this letter written by Warsh confirms the existence of the use of gold swaps).  Warsh, who was the FOMC’s “liaison” between the Fed and Wall Street, wrote a letter back to GATA denying the request.

The fact that Warsh has openly acknowledged that the Fed manipulates assets, including an implicit admission that the Fed seeks to suppress the price of gold,  might give some in the gold community some hope that Warsh, if appointed to the Chair of the Fed, might reign in the Fed’s over interference in the financial markets.

On the contrary, I believe this makes him a bigger threat to democracy, capitalism and freedom than any of his recent predecessors.  Warsh is better “pedigree’d” and politically connected than either Bernanke or Yellen.  His high level involvement in the Bilderberg Group ties him directly to the individual aristocrats who are considered to be the most financially and politically powerful in the western world.    Without a doubt he has far more profound understanding of the significance of gold as a monetary asset than any modern Federal Reserve FOMC member except, perhaps, Alan Greenspan.

The good news for the gold investing community is that it becomes increasingly evident that China, together with Russia and several other eastern bloc countries, is working to remove the dollar as the reserve currency and reintroduce gold into the global monetary system.  A contact and subscriber to my Mining Stock Journal who happens to live and work in Shanghai has sent further evidence  (and here) that China is working toward launching a gold-backed yuan oil futures contract.

This will be a complete game-changer.  It’s also likely why the western Central Banks have doubled their efforts to keep the price of suppressed over the last 6  weeks.   My contact believes there’s a possibility that the contract will be rolled out after Xi is “re-elected” toward the end of October (the Party Congress convenes after the week-long National Holiday observance).

My personal view is that China will work more gradually to roll out a futures contract that effectively “disconnects” the petro-dollar and the dollar’s reserve status in order to minimize the adverse, albeit temporary, consequences of this.  The first iteration could be a simple yuan-denominated contract to get the system working.  The foremost consequence of this, of course, will be the massive transfer of wealth and power from the United States and its European vassal countries to the emerging global power in the eastern hemisphere.

The US Economy Is Failing – Paul Craig Roberts

IRD Note:    Along with the housing market, the entire economy is beginning to collapse. Unless the Fed implements another round of trillions in money printing, the laws of economics will take control of the system. With the housing market, the point of inflection downward began to occur in late spring/early summer. I have detailed this assertion with copious amounts of data and ways to profit from this insight in recent  Short Seller’s Journals.  Despite the melt-up in homebuilder stocks, one of my ideas from last week was down 10% through Friday.

—————

The commentary below is by Paul Craig Roberts:

Do the Wall Street Journal’s editorial page editors read their own newspaper?

The front page headline story for the Labor Day weekend was “Low Wage Growth Challenges Fed.” Despite an alleged 4.4% unemployment rate, which is full employment, there is no real growth in wages. The front page story pointed out correctly that an economy alleged to be expanding at full employment, but absent any wage growth or inflation, is “a puzzle that complicates Federal Reserve policy decisions.”

On the editorial page itself, under “letters to the editor,” Professor Tony Lima of California State University points out what I have stressed for years: “The labor-force participation rate remains at historic lows. Much of the decrease is in the 18-34 age group, while participation rates have increased for those 55 and older.” Professor Lima points out that more evidence that the American worker is not in good shape comes from the rising number of Americans who can only find part-time work, which leaves them with truncated incomes and no fringe benefits, such as healh care.

Positioned right next to this factual letter is the lead editorial written by someone who read neither the front page story or the professor’s letter. The lead editorial declares: “The biggest labor story this Labor Day is the trouble that employers are having finding workers across the country.” The Journal’s editorial page editors believe the solution to the alleged labor shortage is Senator Ron Johnson’s (R.Wis.) bill to permit the states to give 500,000 work visas to foreigners.

In my day as a Wall Street Journal editor and columnist, questions would have been asked that would have nixed the editorial. For example, how is there a labor shortage when there is no upward pressure on wages? In tight labor markets wages are bid up as employers compete for workers. For example, how is the labor market tight when the labor force participation rate is at historical lows. When jobs are available, the participation rate rises as people enter the work force to take the jobs.

I have reported on a number of occasions that according to Federal Reserve studies, more Americans in the 24-34 age group live at home with parents than independently, and that it is those 55 and older who are taking the part time jobs. Why is this? The answer is that part time jobs do not pay enough to support an independent existence, and the Federal Reserve’s decade long zero interest rate policy forces retirees to enter the work force as their retirement savings produce no income. It is not only the manufacturing jobs of the middle class blue collar workers that have been given to foreigners in order to cut labor costs and thus maximize payouts to executives and shareholders, but also tradable professional skill jobs such as software engineering, design, accounting, and IT—jobs that Americans expected to get in order to pay off their student loans.

The Wall Street Journal editorial asserts that the young are not in the work force because they are on drugs, or on disability, or because of their poor education. However, all over the country there are college graduates with good educations who cannot find jobs because the jobs have been offshored. To worsen the crisis, a Republican Senator from Wisconsin wants to bring in more foreigners on work permits to drive US wages down lower so that no American can survive on the wage, and the Wall Street Journal editorial page editors endorse this travesty!

The foreigners on work visas are paid one-third less than the going US wage. They live together in groups in cramped quarters. They have no employee rights. They are exploited in order to raise executive bonuses and shareholder capital gains. I have exposed this scheme at length in my book, The Failure of Laissez Faire Capitalism (Clarity Press, 2013).

When Trump said he was going to bring the jobs home, he resonated, but, of course, he will not be permitted to bring them home, any more than he has been permitted to normalize relations with Russia.

In America Government is not in the hands of its people. Government is in the hands of a ruling oligarchy. Oligarchic rule prevails regardless of electoral outcomes. The American people are entering a world of slavery more severe than anything that previously existed. Without jobs, dependent on their masters for trickle-down benefits that are always subject to being cut, and without voice or representation, Americans, except for the One Percent, are becoming the most enslaved people in history.

Americans carry on by accumulating debt and becoming debt slaves. Many can only make the minimum payment on their credit card and thus accumulate debt. The Federal Reserve’s policy has exploded the prices of financial assets. The result is that the bulk of the population lacks discretionary income, and those with financial assets are wealthy until values adjust to reality.

As an economist I cannot identify in history any economy whose affairs have been so badly managed and prospects so severely damaged as the economy of the United States of America. In the short/intermediate run policies that damage the prospects for the American work force benefit what is called the One Percent as jobs offshoring reduces corporate costs and financialization transfers remaining discretionary income in interest and fees to the financial sector. But as consumer discretionary incomes disappear and debt burdens rise, aggregate demand falters, and there is nothing left to drive the economy.

What we are witnessing in the United States is the first country to reverse the development process and to go backward by giving up industry, manufacturing, and tradable professional skill jobs. The labor force is becoming Third World with lowly paid domestic service jobs taking the place of high-productivity, high-value added jobs.

The initial response was to put wives and mothers into the work force, but now even many two-earner families experience stagnant or falling material living standards. New university graduates are faced with substantial debts without jobs capable of producing sufficient income to pay off the debts.

Now the US is on a course of travelling backward at a faster rate. Robots are to take over more and more jobs, displacing more people. Robots don’t buy houses, furniture, appliances, cars, clothes, food, entertainment, medical services, etc. Unless Robots pay payroll taxes, the financing for Social Security and Medicare will collapse. And it goes on down from there. Consumer spending simply dries up, so who purcheses the goods and services supplied by robots?

To find such important considerations absent in public debate suggests that the United States will continue on the country’s de-industrialization, de-manufacturing trajectory.

Peak Housing Bubble: 2008 Deja Vu All Over Again

Existing Home Sales were released Wednesday and the NAR’s seasonally adjusted annualized rate metric was down 1.7% from July. July was down 1.3% from June. The NAR’s SAAR metric is at its lowest rate since last August. Naturally the hurricane that hit Houston is being attributed as the primary culprit for the lower sales rate. Interestingly, the “not seasonally adjusted” monthly number for the South region was higher in August than in July. Moreover, I’m sure the NAR’s statistical “wizards” were told to “adjust” for Houston. So I’m not buying the excuse.

As for the NAR’s inventory narrative, that’s a bunch of horse hooey. Recall the chart I’ve posted a couple times in previous issues which shows that sales volume is inversely correlated with inventory – this is 17 years of data:

In other words, sales volume increases as inventory declines and sales volume declines as inventory rises. This is intuitive as prospective buyers will get desperate and rush to secure a purchase when inventory is low. Conversely,when a prospective buyer sees inventory climbing, the tendency will be to wait to see if prices come down.

It’s disingenuous for the NAR to claim that low inventory is affecting sales. Based on its own calculus, there’s 4.2 months of supply right now. This is up from 3.8 months in January. In fact, from December through March, months supply was said to have been well under 4 months. And yet, the monthly SAAR sales for each month December through March averaged 4.5% above the level just reported for August. In other words, the excuse put forth by the NAR’s chief “economist” is undermined by the NAR’s own numbers. However, given that the inventory expressed as “months supply” has been rising since April, it should be no surprise that sales are declining. This is exactly what would have been predicted by the 17 years of data in the sales vs inventory chart above.

The other statistic that undermines the “low inventory is affecting sales” propaganda is housing starts. Housing starts peaked in November 2016 and have been in a downtrend since then. Robert Toll (Toll Brothers – TOL) stated directly in his earnings commentary a couple weeks ago that “supply is not a problem.” Furthermore, DR Horton – the largest homebuilder in the country) is carrying about the same amount of inventory now as was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. Starting in 2008, DHI began writing down its inventory in multi-billion dollar chunks. Sorry Larry (NAR chief “economist” aka “salesman”), there are plenty of newly built homes available for purchase.

The Fannie and Freddie 3% down payment, reduced mortgage insurance fee program that has been in effect since January 2015 has “sucked” in most of the first-time buyers who can qualify for a mortgage under those sub-prime quality terms. If the housing market cheerleaders stated that “there is a shortage of homes for which subprime buyers can qualify to buy,” that’s an entirely different argument.

Housing price affordability has hit an all-time low. Again, this is because of the rampant home price inflation generated by the Fed’s monetary policy and the Government’s mortgage programs. The Government up to this point has done everything except subsidize down payments in order to give subprime quality borrowers the ability to take down a mortgage for which they can make (barely) the monthly mortgage payment. At this stage, anyone with a sub-620 FICO score who is unable to make a 3% down payment and who does not generate enough income to qualify under the 50% DTI parameter should not buy a home. They will default anyway and the taxpayer will be on the hook. As it is now, the Government’s de facto sub-prime mortgage programs are going to end badly.

Speaking of the 50% DTI, that is one of the qualification parameters “loosened” up by Fannie Mae. A 50% DTI means pre-tax income as a percentage of monthly debt payments. Someone with a 50% DTI is thereby using close to 70% or more of their after-tax cash flow to service debt. This is really not much different from the economics of the “exotic” mortgages underwritten in the last housing bubble. As the economy worsens, there will be sudden wave of first-time buyer Fannie Mae and Freddie Mac mortgage defaults. I would bet that day of reckoning is not too far off in the future.

The Fed has fueled the greatest housing price inflation in history. In may cities, housing prices have gone parabolic. But to make matters worse, this is not being fueled by demand which exceeds supply.

After all, we know that homebuilders have been cutting back on new home starts for several months now. Price inflation is the predominant characteristic of this housing bubble. The price rise since 2012 has been a function of the Fed’s enormous monetary stimulus and not supply/demand-driven transactions.

The effect of the Fed’s money printing and the Government’s mortgage guarantee programs has been to fill the “void” left by the demise of the private-issuer subprime mortgages in the mid-2000’s housing bubble. The FHA has been underwriting 3.5% down payment mortgages since 2008. In 2008, the FHA’s share of the mortgage market was 2%. Today it’s about 20%. Fannie Mae and Freddie Mac allow 3% down payment mortgages for people with credit scores as low as 620. 620 is considered sub-prime. On a case-by-case basis, they’ll approve mortgage applications with sub-620 credit scores. Oh, and about that 3% down payment. The Government will allow “sweat” equity as part of the down payment from “moderate to low income” borrowers. Moreover, the cash portion of the down payment can come from gifts, grants or “community seconds.” A “community second” is a subordinated (second-lien) mortgage that is issued to the buyer to use as a source of cash for the down payment.

Again, I want to emphasize this point because it’s a fact that you’ll never hear discussed by the mainstream media:  The Government mortgage programs resemble and have replaced the reckless “exotic” mortgage programs of the mid-2000’s housing bubble.

To compound the problem, most big cities are being hit with an avalanche of new apartment buildings.  In Denver, the newer “seasoned” buildings are loading up front-end incentives to compete for tenants.  There’s another tidal wave of new inventory that will hit the market over the next six months.  This scene is being replayed in all of the traditional bubble cities.   As supply drives down the cost of rent, the millennials who can barely qualify for a mortgage that sucks up more than 50% of their pre-tax income will revert back to renting .  This will in turn drive down the price of homes.

Flippers who are leveraging up to pay top-dollar will get stuck with their attempted housing “day-trade.”  Studies have shown that it was flippers who were unable to unload their homes who triggered the 2008 collapse, as they “jingle-mailed” the keys back to the greedy bankers who funded the “margin debt” for their failed trade.

It may not look exactly the same as late 2007 right now.   But there’s no question that it will be deja vu all over again by this time next year…

The above commentary and analysis is directly from last week’s Short Seller’s Journal. In the latest issue I presented three ways to take advantage of the coming collapse in the housing and mortgage market, one of which is already down 10%.  If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S.   – James

Peak Housing Bubble: The Big Short Is Back

Wash, rinse, repeat. The American public never gets tired of the destructive abuse it suffers from Wall St. The deep sub-prime mortgage market is roaring back and, with it, the nuclear bomb-laden derivatives that triggered round one of The Big Short de facto financial system collapse:

It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system. But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages.

Citigroup is leading the charge this time around, instead of Bear Stearns and Lehman:   Citi Revives The Trade That Blew Up The System In 2008.   Oh, and do not be mistaken, the financial “safeguards” legislated by Congress and widely heralded by Obama and Elizabeth Warren are completely useless.

The commentary below is a guest post from a reader and Short Seller’s Journal subscriber who is a 25-year subprime lending professional. Below, he shares his wisdom of experience in explaining why the latest deep subprime mortgage products hitting the market is the definitive “bell” that rings when a market bubble is about to pop.

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Before the Lehman crash I was part of the brokering and banking system that built billion dollar pools of commercial cow manure loans we farmed out to Lehman Bros. JPM, CIT, Zion’s Bank, Bank of the West and others did the same.

Lehman was the poster child. They stretched the envelope of mortgage insanity. Their failure was the instant death knell of that terrible scam. Every originator of these pools and brokering conduits failed. Some disappeared in 24 hours. But like the undead, these NINJA warriors are back from the grave just in time to profit from the biggest housing bubble in human history.

While “The Big Short” bubble/bust wiped out the industry, the overseers walked away collectively with billions and no one went to jail other than a few scape-goated underlings. But like the survivors of a 7 year mortgage apocalypse cycle of feast or famine, those who made it are back are more corrupt than ever.

No one learns from these mistakes. Bankers and brokers are like “Chucky” in the “Child’s Play” horror movies. It wasn’t more than a few days after Lehman imploded that the entire fraudulent subprime commercial and residential loan edifice came down. The commercial bank loan system shut down for nearly a year. Banks failed by the hundreds. Thousands more were propped up with TARP and HARP.

What got me going is that the latest product being pimped by Citadel Capital reminds me of a classic bucket shop operation with all the worst elements of gangster loan sharks, knee breakers and “vig” of 5% a week. Perhaps one of the most insidious aspects of the subprime business being originated by Citadel is the manner in which they get around the legislation implemented under Obama via Dodd-Frank that was supposed to protect the public from predatory lending and Wall Street fraud. Citadel specifically has a lending program that is called “Outside Dodd Frank.”

Citadel really caught my eye. There’s a wealth of information on Citadel Servicing Corporation, some from their web page and some from the ‘net itself. While the mainstream media heralds the merits of the Dodd Frank legislation, there are large loopholes in the mortgage broker/banker regulations that circumvent the alleged “safeguards.”

This mortgage origination program, which is disguised as a “business loan program” was sent to me by Citadel Capital, a relatively new and rapidly growing residential and commercial lender. Citadel Capital is part of the Citadel LLC hedge fund empire.

As a commercial loan broker for the last 25 years, I can tell by the rates being charged for these loans that the “professionals” at Citadel hold their nose while they package the junk paper and send them as “mortgage pools” to Wall Street. The Citadel junk is much like the old sub prime NINJA crap that filled portfolios from coast to coast.

Citadel doesn’t want these loans to ripen and turn sour, defaulting while they still sit on Citadel’s balance sheet waiting to be shipped to Wall Street’s financial sausage factory. It’s likely they sit on Citadel’s shelf for no more than a month or so and, like smuggled heroin, peddled to the next middle man in the chain for cutting, diluting and selling to the end user.

Most companies like Citadel borrow on wholesale lines capital provided by yield-starved pension funds. These funds are on the hook for as long as it takes Citadel to churn them like rancid butter, as they aggregate a loan pool big enough to interest Wall Street into securitizing the pooled loans into the infamous CDO’s (collateralized debt obligations). These are the financial nuclear weapons that blew up Wall Street in 2008.

The big fish,TBTF banks bailed out by Obama and Bernanke, take the loan pools and repackage them into risk-return-tiered mortgage-backed trusts. They then piece out the tranches to their clients – yield-starved institutional investors and greedy high net worth sitting ducks. Some of the tranches of these financial sausages are given ratings from Moody’s and S&P which are significantly higher than they merit in return for a small part of the “vig” involved. You are naive if you thought the post-2008 financial “reform” eliminated this important step in the entire process.

The money involved is enormous. The wholesalers – entities like banks and investment funds who provide “warehouse” lines of credit used to fund the loans – get a 3-4% spread as their fee on funds loaned.  When funded, these loans are priced to give the aggregator such as Citadel premiums of 5-9% or more, depending on the various ingredients stirred in to “juice” the yield. These premiums are apportioned to the various parties involved in funding the mortgages and bringing borrowers to the table. The mortgage brokers offer up their clients like lambs to the slaughter, concerned with one thing, collecting the points paid by the borrower plus handsome rebates from Citadel where allowed by state or federal statute.

There’s even bigger “vig” for bringing the borrowers to the party. Citadel brokers and outside mortgage brokers can make up to 8-9% on the amount borrowed depending on both the risk-profile of the borrower and the willingness of the borrower to accept various “bells and whistles” which ultimately increase the cost of the loan. But these hidden fees are not paid up-front by the borrower. Instead, they’re built into the high rate charged to the borrower. The Citadel “group” gets paid when the loan is part of a pool that is marked up in value and sold to Wall Street as material for its financial sausage.

Speaking of those “bells and whistles,” which substantially increase the cost of the mortgage to the borrower, and having seen how these loans were crafted in the past, I know that any one of these “innocuous” terms written into the fine print can increase the cost to the borrower by 1 percent or more. To make matters worse, these are the terms that make it nearly impossible for the borrower to make payments for more than a short period of time.

The borrowers stagger into loan offices like Dead Men Zombies with 500 FICOs and nary a pulse. Many are remnants of the last sub prime crash, walking wounded waiting to be fleeced again. They provide some bank statements, often photo-shopped by the borrower or the broker. They offer up hand-me-down, shop worn camp fire stories of woe that get better with each telling. The greed-driven broker feigns a look of sorrow and understanding. If I’ve heard 1 story I’ve heard 100.

Even if they’ve defaulted on the last 3 loans, filed Chapter 11 or 22 and stiffed every creditor in town, somehow they’ll convince the underwriter they’ve had their St Francis of Assisi debt moment and will never be late again. Listen up. There’s a reason they have a 500 FICO. They’re deadbeats with a real estate deal to lend on. They’ll willingly agree to the high-priced terms in order to get back in the game of buying and flipping.

The end investor buys this tranche and yet still might carve it up like a hog, selling some slices here and there; repriced and re-rated by the rating agencies to cover the stink. They might keep the best parts for themselves while dumping the low cuts and offal to a new tier of overseas zombie, yield-starved investors.

The science behind these mortgage conveyor belts was perfected 35 years ago. The bankers pulling the levers will never be prosecuted; just fines; pittance by the DOJ. The brokers will never look back. They’re unlikely to be prosecuted except for the rare ones; those who get caught because they stayed in the game too long or didn’t cover their tracks.

IRD’s note:  Citadel is not the only purveyor of these financial time-bombs. There’s several “bucket shop” deep sub-prime mortgage generators springing to life across the country. As an example, there’s a company called SCL Mortgage (“SCL” stands for “Special Circumstances Lending”) based out of Castle Rock, Colorado.  Castle Rock is a “poster child” city for the previous and current housing bubble.  The Company was founded and is led by a one of  the deep subprime “NINJA warriors” of the previous  “Big Short” era,  as are several of his employees.

Can The Fed “Normalize” Without Collapsing The System?

The official lies about the economy keep mounting.  The Dallas Fed reports that its regional economic activity metric surged in early September, despite the complete shut-down of Houston for a few days during the “measurement” period.  The “general activity” index spiked up to a 7-month high. Clearly the quality of this report is suspect, to say the least.

Contrary to this report, the Chicago Fed’s National Activity Index plunged to -0.31.  It was the weakest reading since last August and a huge plunged from the July reading of 0.03. The Street was expecting 0.11.  Because of the nature of this index (85 sub-components measured at the national level) it takes a lot to “move the needle” for this metric.  A negative point-three-one reading implies that the national economy broadly contracted during August.

Clearly the Dallas Fed propaganda was intended to reinforce the Fed’s empty threat to raise interest rates and “normalize” its balance sheet .  Silver Doctors invited me onto their Friday weekly market podcast to discuss the latest propaganda that spewed forth from the Fed’s FOMC meeting earlier in the week, the western Central Banks’ losing battle to push the price of gold lower and the continuing deterioration in the U.S. political and economic system:

The precious metals is in the early stages of another bull market run, like the one that occurred from 2001-2011. This one is being driven by the China-led movement to remove the dollar as the world’s reserve currency and replace with a currency that will incorporate incorporating gold back into the monetary system. The Mining Stock Journal is a bi-weekly newsletter that will help you get invested ahead of the next huge capital flow into the precious metals sector. To find more, click here:  Mining Stock Journal

“Best 20 quid a month I’ve ever spent.” – subscriber from the UK

“Never Let A Good Crisis Go To Waste” – And Short AMZN

The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.

Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).

Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.

Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.

Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).

The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).

The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:

The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.

It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.

Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.

Trump has suggested removing the debt ceiling. I’m certain it was “trial balloon” to see how vocal the opposition to this idea would be. The Democratic leaders love the idea. I have not heard much resistance from the Republicans. My bet is that by this time next year, or maybe even by the end of the year, there will not be a debt-ceiling on the amount of money the Government can borrow. In truth, this is no different than giving the Government an unlimited printing press.

Corporate high yield debt issuance has exploded globally, as you can see from the chart to the right, which shows the amount of junk bond debt issuance annually on a trailing twelve month basis. Globally the amount outstanding has increased by more than 400%. Close to 60% of this issuance has occurred in the U.S. In conjunction with this, U.S. corporate debt hits an all-time high every month. Most of this debt is being used either to re-purchase stock or over-pay for acquisitions (see the AMZN/Whole Foods deal).

Currently the amount of debt issued to complete acquisitions as a ratio of Debt/EBITDA is at an all-time high, with 80% of all deals incurring a Debt/EBITDA of 5x or higher. The last time this ratio hit an all-time high was, you guess it, in 2007. As an example, let’s look at AMZN’s acquistion of Whole Foods. AMZN issued $16 billion of debt in conjunction with its acquisition of Whole Foods. No one discussed this, but the Debt/EBITDA used in the transaction was 13x. Whole Foods operating income plunged 25% in the first 9 months of 2017 vs the first nine months of 2016.

A 13x multiple outright for a retail food business with rapidly declining operating income is an absurd multiple. That the market let AMZN issue debt in an amount of 13x Whole Food’s EBITDA is outright insane. What happened to all that “free cash flow” that Amazon supposedly generates? According to Bezos, it was $9.6 billion on a trailing twelve month basis at the end of Q2. If so, why did AMZN need to issue $17 billion in debt?  We know that the truth (see previous analysis on AMZN) is that AMZN does not, in fact, generate free cash flow but burns cash on a quarterly basis. Currently AMZN is busy slashing prices at Whole Foods, which will drive WF’s operating margin from 4.5% toward zero. This is the same model that is used in AMZN’s e-commerce business, which incurred an operating loss in Q2.

In my view, AMZN continues to be one of the best short ideas on the board – the graph below is as of last Friday (Sept 15th) when AMZN closed at $986, Short Seller Journal subscribers were given some put option ideas as alternatives to shorting AMZN outright (click to enlarge):

The chart above is a 1-yr daily. Technical analysis adherents would see the head and shoulders formation I’ve highlighted in AMZN’s chart. This is potentially quite bearish. Despite the Dow and SPX hitting a series of all-time highs this month, AMZN has not come within 5% of its all-time high on July 26th ($1052 close). It traded up to $1083 intra-day the next day before closing below the previous day’s close and then dropped its Q2 earnings bombshell when the market closed. Based on its $986 close this past Friday, it’s 9% below its July 27th intra-day high-tick. Some might say that’s “halfway to bear market territory.”

AMZN lost $31 last week despite the SPX hitting a record high on Wednesday. This negative divergence is bearish.  In addition, Walmart has taken off the gloves and is directly attacking AMZN’s e-commerce business model.  WMT offers 2-day free shipping on millions of items without the requirement of spending money upfront to join a “membership.”  WMT is also running television ads during prime time which attack some of AMZN’s marketing gimmicks.

Some other bearish technical indicators, a highlighted above: 1) Since the end of July, the volume on down days in the stock price has been higher than the the volume on up days; 2) The RSI has been declining gradually since early April; 3) the MACD (bottom panel) has been declining steadily since early June. All three of these indicators reflect large institutional and/or hedge funds selling their positions.

The stock is sitting precariously on its 50 dma (yellow line above). I would not be surprised to see it test its 200 dma, currently $904, before it reports Q3 earnings. If you want to speculate on this possibility, the October 6th weekly $920 – $930 puts, depending on how much premium you want to pay, might be a good bet. You might also want to out another week to the October 20th series. One caveat is that AMZN will no doubt manipulate its numbers using merger and acquisition accounting gimmicks, which give the acquiring a window in which to egregiously manipulate GAAP numbers. I don’t know if the market will “see” through this or not. But based on the performance of the stock since AMZN dropped its Q2 earnings bombshell, I’d say the stock on “on a short leash.”

The above commentary and analysis is directly from last week’s Short Seller’s Journal. If you would like to find out more about this service, please click here:  Short Seller’s Journal subscription info.