Tag Archives: Fed funds rate

Why Housing Won’t Bounce With Lower Rates

“Our advice is to own as little exposure U.S. equity exposure as your career risk allows.” – Martin Tarlie, member of portfolio allocation at Grantham, Mayo, Van Otterloo investment management

The following is an excerpt from the latest Short Seller’s Journal:

Economy is worse than policy makers admit publicly – Less than four months ago, the FOMC issued a policy statement that anticipated four rate hikes in 2019 with no mention of altering the balance sheet reduction program that was laid out at the beginning of the QT initiative. It seems incredible then that, after this past week’s FOMC meeting, that the Fed held interest rates unchanged, removed any expectation for any rate hikes in 2019, and stated that it might reduce its QT program if needed. After reducing its balance sheet less than 10%, the Fed left open the possibility of reversing course and increasing the size of the balance sheet – i.e. re-implementing “QE” money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

Housing market – As I suggested might happen after a bounce in the first three weeks of January, the weekly purchase mortgage index declined three weeks in a row, including a 5% gap-down in the latest week (data is lagged by 1 week).  This is despite a decline in the 10-yr Treasury rate to the lowest rate for the mortgage benchmark Treasury rate since January 2018.

Not surprisingly, the NAR’s pending home sales index – released last Wednesday mid-morning for December – was down 2.2% vs November and tanked nearly 10% vs. December 2017. Pending sales are for existing home sales are based on contracts signed. This was the 12th straight month of year-over-year declines. Remarkably, the NAR chief “economist” would not attribute the decline to either China or the Government shutdown. He didn’t mention inventory either, which has soared in most major metro areas over the past couple of months.

For me, the explanation is pretty simple: The average household’s cost to service debt has reached a point at which it will become more difficult to find buyers who can qualify for a conventional mortgage (FNM, FRE, FHA):

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century.  Fannie Mae raised the maximum DTI (debt-to-income ratio – percentage of monthly gross income that can be used for interest payments) to 50% in mid-2017 to qualify for a mortgage. This temporarily boosted home sales. That stimulus has now faded. And despite falling interest rates, the housing market continues to contract.

That said, the Census Bureau finally released new home sales for November. It purports that new homes on a seasonally adjusted, annualized rate basis rose a whopping 16.9% from October. I just laughed when I saw the number. The calculus does not correlate either with home sales data reported by new homebuilders or with mortgage purchase applications during that time period (new home sales are based on contract signings). 90% of all new home buyers use a mortgage.

The November number was a 7.7% decline from the November 2017 SAAR. According to the Census Bureau, the months’ supply of new homes is at 6, down from October’s 7 but up from November 2017’s 4.9. A perusal of homebuilder balance sheets would show inventories near all-time highs (homebuilders do not always list finished homes on MLS right away if a community already has plenty of inventory). The average sales price of a new home dropped to 8.4% from $395,000 in October to $362,000 in November. Anyone who purchased a new home with a less than 9% down payment mortgage during or prior to October is now underwater on the mortgage.

Absent more direct Government subsidy and Fed stimulus, the housing market is going to continue contracting, with prices falling. Anyone who bought a home with less than a 10% down payment mortgage over the last 3-5 years will find themselves underwater on their mortgage.  I expect home equity mortgage delinquencies and default to begin rising rapidly in the 2nd half of 2019.

In the last issue of the Short Seller’s Journal, I presented my favorite homebuilder shorts along with put option and short selling call option ideas. You can learn more about this newsletter here:   Short Seller’s Journal information

 

The Fed Blinked – Gold And Silver Are Going Higher

Price inflation has been badly misrepresented by CPI figures and have been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap. – Alasdair Macleod, “Ten Factors To Look For In Gold In 2019

The following is an excerpt from the latest issue of the Mining Stock Journal, which included an analysis of a  highly undervalued, relatively new and unknown junior mining company advancing a gold-silver project in Mexico.

As I have suggested in the past (in more detail in the Short Seller’s Journal), the Fed is retreating quickly from rate hikes and balance sheet reduction (QT). The Fed deferred on raising rates at its FOMC meeting this week. What I found somewhat shocking, however, was the removal of reference to “further gradual rate increases.”

Perhaps more shocking was the reference to the possibility of re-starting the money printing press:  “…the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy…” That statement translated means, “we’ll have to print more money eventually.”

This should be extremely bullish for the precious metals sector. The only issue is the timing of the next big move higher. That depends on the degree to which the banks can continue controlling the price with gold and silver derivatives.  No one knows that answer, not even the banks. At some point, as occurred from 2008-2011, the western banks will be unable to suppress the natural price rise of gold/silver. That said, the Chinese and the Russians could pull the rug out from under the western manipulation if and when they want. That will happen eventually as well.

Alasdair Macleod wrote a brief and insightful essay from which I quoted and linked above describing key factors in 2019 that could push the price of gold significantly higher. Most of the factors are familiar, especially for subscribers to my Short Seller’s Journal. First and foremost will be the Fed, along with Central Banks globally,  reverting to easy monetary policy.

Notwithstanding official propaganda to the contrary, the U.S./global economy is rapidly slowing down. Many areas are contracting. Government spending deficits will soar as tax revenues fall behind the rate at which Government spending is increasing.

At some point, the Government will plead with the Fed to help finance Treasury issuance (this will occur in the EU, Japan and China as well), creating another acceleration in monetary inflation/currency devaluation. This will act as a transmission mechanism to inflate the dollar price of gold. Smart investors understanding this dynamic, and who have the financial resources, will move dollars out of financial assets and into gold. See 2008-2011 for an example of this process.

Gold has outperformed almost every major asset class since 2000:

Gold has outperformed most other assets since 2000 because Central Banks globally began to implement extreme monetary policies in response to the global stock market crash in 2000 led by tech stocks. As John Hathaway, manager of the Tocqueville gold fund, describes it, “gold has been a winning strategy since monetary policy became unhinged nearly two decades ago.”

In addition to the fiscal and monetary policies implemented globally in response to deteriorating economic and financial conditions, Alasdair identifies four factors directly affecting the price of gold this year.

One factor not widely perceived or understood by the markets is the gradual and methodical shift away from using the U.S. dollar for trade and as a reserve asset by Russia and China. It’s clear that both countries are swapping dollar reserves for gold and conducting an increasing percentage of bi-lateral trade with their trading partners in each country’s sovereign currency.

As an aside, gold has been soaring in most currencies besides the dollar. At some point, this shift away from using the dollar as a reserve currency will remove the “safe haven asset” status of the dollar, causing a considerable decline in the dollar vs global currencies. Concomitantly, the dollar price of gold will soar.

Another factor identified by Macleod is price inflation: “price inflation has been badly misrepresented by CPI figures and has been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap.”

In my view, the price inflation factor as it affects investor attitudes toward gold will be a “slowly then suddenly” process. Investors and the population in general tend to move in herds. Currently the headline Government CPI is accepted and discussed as reported. At some point,  a large contingent of mainstream institutional investors will decide the Government’s measurement of inflation is wrong and will begin to buy gold and silver. The masses will soon follow. We saw this dynamic leading up to the parabolic move by gold in 1979-1980.

The third factor is “monetary inflation.” Most people think of price when they see the term “inflation.” But the true economic definition of “inflation” is the rate of growth in the money supply in excess of the rate of growth in economic (wealth) output. This in essence reduces the value of each dollar. Think about it terms of an increasing amount of dollars made available to chase a fixed supply of goods and services. That’s the monetary inflation that causes “price” inflation. Rising prices are the manifestation of monetary inflation.

As discussed at the beginning, at some point the Fed will be forced to re-start the printing press or face the consequences of a rapid economic and financial collapse.  Macleod points out that “these are exactly the conditions faced by the German government between 1918 and 1923, and the likely response by the Fed will be the same. Print money to fund government deficits.”  Recall that the policies used by the Weimar Government eventually led to hyper price inflation. The hyperinflation did not occur until the early 1920’s. But the policies leading to this condition began in 1914, when Germany World War 1 started and Germany’s huge war debt began to pile up. This is strikingly similar to the huge U.S. Government debt outstanding currently.

The final factor mentioned by Macleod is simply, “Gold is massively under-owned in the West.” By 1980, institutional investors on average held 5% of their assets in gold. Currently the percentage allocation to gold (or fake gold like GLD) is well under 1%. All it would take for a massive price reset  in gold and silver is for institutions to allocate 1-2% of their assets to gold. I believe eventually that allocation percentage will move back to 3-5%, which will drive the price of gold well over $2000/oz.

It’s Lose-Lose For The Fed And For Everyone

A friend asked me today what I thought Powell should do.  I said, “the system is screwed. It ultimately doesn’t matter what anyone does.   The money printing, credit creation and artificially low interest rates over the last 10 years has fueled the most egregious misallocation of capital in history of the universe.”

Eventually the Fed/Central Banks will print trillions more – 10x more than the last time around. If they don’t this thing collapses. It won’t matter if interest rates are zero or 10%. You can’t force economic activity if there’s no demand and you’ve devalued the currency by printing it until its worth next to nothing and people are toting around piles of cash in a wheelbarrow worth more than the mountain of $100 bills inside the wheelbarrow.

The price of oil is down another $3.50 today to $46.50. That reflects a global economy that is cratering, including and especially in the U.S. Most people will listen to the perma-bullish Wall Streeters, money managers and meat-with-mouths on bubblevision preach “hope.”

Anyone who can remove their retirement funds from their 401k or IRA and doesn’t is an idiot. Anyone thinking about selling their home but is waiting for the market to “climb out of this small valley in the market” will regret not selling now.

Forget Powell. What can you do? There is no asset that stands on equal footing with gold. You either own it or you do not.

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” – George Bernard Shaw

The Fed: Lies, Propaganda And Motive

The agenda of the Fed is to hold up the system for as long as possible. The biggest stock bubble in U.S. history has been fueled by 10 years of negative real interest rates. The only way to justify that policy is to create phony inflation statistics. Based on historical interest rates and based on the alleged unemployment rate, a “normalized” Fed funds rate should be set at 9%, which reflects a more accurate inflation rate plus a 3% premium. The last time the unemployment rate was measured at 3.7% was October 1969. Guess what? The Fed funds rate was 9%. I guess if you live an a cave and only buy TV’s and laptops, then the inflation rate is probably 2%…

Silver Doctor’s Elijah Johnson invited me to discuss the FOMC policy decision released on Wednesday afternoon:

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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.

Will The Fed Really “Normalize” Its Balance Sheet?

To begin with, how exactly does one define “normalize” in reference to the Fed’s balance sheet?  The Fed predictably held off raising rates again today.  However, it said that beginning in October it would no longer re-invest proceeds from its Treasury and mortgage holdings and let the balance sheet “run off.”

Here’s the problem with letting the Treasuries and mortgage just mature:   Treasuries never really “mature.” Rather, the maturities are “rolled forward” by refinancing the outstanding Treasuries due to mature.   The Government also issues even more Treasurys to fund its reckless spending habits.  Unless the Fed “reverse repos” the Treasurys right before they are refinanced by the Government, the money printed by the Fed to buy the Treasurys will remain in the banking system.  I’m surprised no one has mentioned this minor little detail.

The Fed has also kicked the can down the road on hiking interest rates in conjunction with shoving their phony 1.5% inflation number up our collective ass.  The Fed Funds rate has been below 1% since October 2008, or nine years.   Quarter point interest rate hikes aren’t really hikes. we’re at 1% from zero in just under two years. That’s not “hiking” rates.  Until they start doing the reverse-repos in $50-$100 billion chunks at least monthly, all this talk about “normalization” is nothing but the babble of children in the sandbox.  I think the talk/threat of it is being used to slow down the decline in the dollar.

To justify its monetary policy, Yellen stated today that she’s, “very pleased in progress made in the labor market.”  Again, how does one define progress?  Here’s one graphic which shows that the labor market has been and continues to be a complete abortion:

The labor force participation rate (left y-axis) has been plunging since 2000. It’s currently below 63%. This means that over 37% of the working age population in the United States is not considered part of the labor force. That’s close to 100 million people between the ages of 15 and 64 who, for whatever reason, are not looking for a job or actively employed. A record number of those employed are working more than one part-time job in order to put food on table and a roof over the heads of their household. Good job Janet! Bravo!.

The blue line in the graph above shows the amount of dollars spent by the Government on welfare. Note the upward point acceleration in the rate of welfare spending correlates with the same point in time at which the labor force participation rate began to plunge. Again, nice work Janet!

The labor force participation rate is much closer to the true rate of unemployment in the United States.  John Williams of Shadowstats.com has calculated the rate of unemployment using the methodology used by the Government a couple of decades ago and has shown that a “truer” rate of unemployment is closer to 23%.

The true level of unemployment  is definitively the reason why the rate of welfare spending increased in correlation with the decline in those considered to be part of the labor force.   It could also be shown using the Fed’s data that another portion of the plunging labor force participation rate is attributable to the acceleration in student loans outstanding.  I would argue that part of the splurge in student loan funding, initiated by Obama, was used to keep potential job-seekers being forced by economic necessity from  seeking jobs and therefore could be removed from the labor force definition, which in turn lowers the unemployment rate.

As I write this, Yellen is asserting that “U.S. economic performance has been good.”  I’d like to get my hands on some of the opioids she must be abusing.  Real retail sales have been dropping precipitously (the third largest retail store bankruptcy in history was filed yesterday), household debt is at an an all-time high, Government debt hits an all-time high every minute of the day and interest rates are at 5,000 year lows (sourced from King World News)

Note to Janet:   near-zero cost of money is not in any way an attribute of an economy that is “doing well.” In fact, record levels of systemic debt and rising corporate and household bankruptcies are the symptoms of failed Central Bank economic and monetary policies. This is further reinforced by the record level of income disparity between the 1% highest income earners and the rest of the U.S. labor force.

The entire U.S. economic and financial system is collapsing.  If the Fed truly follows through on its threat to “normalize” its balance sheet and raise rates, the U.S. will likely collapse sometime in the next couple of years. On other hand, up to this point since Bernanke’s famous “taper” speech in May 2013, most of the Fed’s statements with regard to hiking rates (hiking them for real) and reducing its balance sheet has been nothing but hot air.  And in fact, unless the Fed reverse repos its balance sheet back to the banks, it’s assertion of “balance sheet normalization” is nothing more than another in long series of lies.

“Low Inflation” In Not “Good” – It’s Pure Propaganda

Analysts who advocate a monetary policy that targets “low inflation” are the equivalent of chickens in the barnyard rooting for Colonel Sanders to succeed.   This idea that a low level of inflation being good for the economy is beyond moronic.

The fiat currency money system era was accompanied by the erroneous notion that a general increase in the price of goods and services is “inflation.”  But technically this definition is wrong.  “Inflation” is the “decline in the purchasing power of currency.”  This decline occurs from actions that devalue a currency.  Rising prices are the visible evidence of ongoing currency devaluation.

Currency devaluation occurs when the rate of growth in a country’s money supply exceeds the rate of growth in real wealth output.   Simply stated, it’s when the amount of money created exceeds the amount of “widgets” created, where “widgets” is the real wealth output of an economic system.

In ancient Rome, the currency devaluation occurred when the Roman Government began to “shave” gold and silver coins which enabled it to increase the amount of coins produced from mined gold and silver in order to finance Government spending.  When spending continued to exceed the amount of currency produced, the Government increased the money supply by diluting gold and silver coins with cheaper and more abundant metallic additives.

In the United States currently, currency devaluation occurs through both money printing, which has been cleverly disguised for propaganda purposes as “quantitative easing,” and by the continuous growth in credit creation.   Debt issued behaves exactly the same as printed currency until that time at which the debt is repaid, not by more debt issued, but from money that has been accumulated by the debtor in order to repay and retire the debt.

The U.S. Government has not reduced the amount of debt issued for decades.  Apologists will look at the Treasuries outstanding chart on the Fed’s website and argue that the debt level declined ever so slightly in the late 1990’s.  But this was achieved through accounting gimmicks, not an outright reduction in Federal debt outstanding.

Notwithstanding this, the total level of debt in the U.S. system has been continuously increasing for many decades.  While it’s argued that this is debt and not money supply, it is a fact that debt issued spends just like printed money until the debt is repaid and retired. Thus, currency devaluation has been occurring in the United States on a continuous basis since at least 1913 (founding of the Fed).

Back to the erroneous idea that “low inflation is desirable.”  I defy anyone to research this and present a rational explanation that has ever been offered.  The best I could come up with is “low inflation is good for the economy.”  That is unadulterated ignorance.  That phrase means that “it is good for the Government to devalue the currency.”  Why is it “good” for a consumer to pay higher prices, i.e. more money for goods and services on an ongoing basis?

Inflation, where “inflation” means the true definition, is a subtle mechanism by which the elitists redistribute wealth.   Printing money  benefits those who are closest to the money faucet to the detriment of those who are “downstream” from the flow of new money supply (or credit created).  The banks are always first in line at the money faucet.  The Federal Reserve was erected for that purpose.  The creators of the Fed were all owners of the biggest banks in the U.S. at the time plus the political puppets of those owners.   Go look up the roster of men who founded the Fed for yourself if you don’t believe me.

After the banks, the Government is next in line.  And after that all of the companies that benefit from Government largess.  Inflation, even “low inflation” is not beneficial to anyone other than those who are in a position to take advantage of the currency devaluation mechanism.  Period.  Anyone who tries to argue that “low inflation is good” and that a low inflation target should be a primary goal of the Fed’s monetary policy is either someone who is in position to benefit from that policy (banks, politicians, big corporations etc) or is tragically stupid.

The Public Is Getting Pissed – Ignoring Rule Of Law

“If liberty means anything at all, it means the right to tell people what they do not want to hear.”   – George Orwell

There’s a narrative here that the Government, the Fed, the Trump Administration, etc conveniently ignored.  Here’s the headline list this morning:

  • GM Extends Plant Shutdowns
  • 2nd Quarter GDP Hit As Inventories Tumble In April
  • Retail Sales Tumble Most Since January 2016
  • Pension Crisis Escalates
  • House Majority Whip Shot At Congressional Baseball Practice

Real Clear News reported that Representative De Santis stated to police that the shooter asked “whether Republicans or Dems were on the field before shooting.”  Fox News has confirmed  the report.

The public is getting pissed.  It is told daily, on no uncertain terms, by the White House that the economy is rapidly improving.  The Fed confirms that the economy is improving.  Wall Street chimes in confirming that “narrative.”

The public is told that the unemployment rate is under 5% and the labor market is tight.  But 95 million people in the working age population don’t have jobs.  They are not considered part of the “Labor Force” and have been removed from the statistics altogether by some BLS bureaucrat’s pencil eraser. To be sure, maybe 1/3 or even 1/2 of those people don’t want to work or need to work for some reason (wealthy, wealthy and lazy, inherited income, public assistance of some form, etc).  But 1/2 to 2/3’s of those people would like to find a job that doesn’t entail delivering pizza or washing dishes – in other words, jobs that pay to support a family.

A growing portion of the population understands the underlying truth about the economy that exists behind the propaganda and lies. And they are getting pissed. It’s become clear to anyone desperate enough in their fight to get by that the politicians, corporate elitists and Wall Street crooks are no longer beholden to Rule of Law.   The conclusion for the growing legion of desperate is obvious:  “why should we adhere to Rule of Law?”

At least this time the Deep State can’t shove the “it was ISIS” narrative down our collective gullets.

Gold Continues To Defy Fed’s Attempt To Control The Price

Bloomberg News admitted that it is aware of the Fed’s “hidden” mandate to control the price of gold when it published an article last Sunday titled, “Yellen Can’t Halt Trump Gold Rally That Funds Bet Against” – Bloomberg/Yellen/Gold.

That title, combined with the content of the article, implied that the journalists and editors at Bloomberg are aware that the Fed actively manipulates the price of gold.  It’s hard to know if this admission was put forth intentionally or unwittingly. But the headline outright acknowledges that the Fed’s goal with respect to the price of gold is to prevent it from moving higher. The Fed’s current tool for this purpose is the “good cop/bad cop” routine played out on a daily basis between the Fed Governors who purport the need for more interest rate hikes and the Fed Heads who advocate waiting until the economy improves.

Lost in the smoke of Orwellian propaganda is the absurd notion that the two “rate hikes” were a mere quarter of a percentage point in magnitude.  This can hardly be described as “raising interest rates.”  It certainly is not even remotely close to the concept of “interest rate normalization,” whatever that is supposed to mean.   In mid-2007, about a year before the financial system nearly collapsed, the Fed Funds rate was 5.25%.   A little more than a year later it had been dropped to near zero.

If the financial analyst “Einsteins” define “rate normalization” as the 5.25% level in 2007, it will take about about 20 years using the speed of rate hikes by the Fed over the last two years.   On the other hand, going back to 1954, which is as far back as the Fed’s database takes us for the Fed funds rate, the median level for the Fed Funds rate is somewhere around 7%.   Is THAT level how one would define “normalized rates?”  You can do the math on how long it would take thereby to achieve “normalized interest rates” if 7% is the goal.

Since mid-December 2016, when gold appears to have bottomed out from the manipulated price “correction” that began in August, gold has been trading in defiance of the Fed’s attempts at price control.  Yesterday’s (Wednesday, Feb 22nd) trading action is point in case.  Gold was slammed for about $9 right after the paper trading market on the Comex floored commenced.  This is standard operating procedure.  But about 5 1/2 hours later, when the Fed released the minutes from its last meeting, gold spiked up and reclaimed the full $9 price take-down.    Today gold has soared another $16.

At the Shadow of Truth, we suspect both Yellen and the editorial staff at Bloomberg News are mumbling to themselves.  In today’s episode, we discuss the trading action in gold and the potential more interest rate hikes this year:

Who Is Buying China’s Dumped Treasuries?

According to the latest Treasury International Capital report (for October), China unloaded nearly $42 billion in Treasuries in October. In the last 12 months, China has unloaded nearly $150 billion in Treasuries, equivalent to more than one month’s worth of new Treasury issuance by the U.S. Government.

The Zerohedge/mainstream financial media narrative is that China is selling Treasuries to defend the yuan. They hold reserves other than dollars. Why not sell those? They are trying to unload their Treasuries w/out completely trashing the market. Imagine what would happen to the bond market if China announced a bid wanted in comp for $1.1 trillion in Treasuries. They are working with Russia to remove the dollar’s reserve status and the U.S. doesn’t like it which is why there is an escalating level of military aggression toward Russia and China by the U.S.

Too be sure, China’s Treasury selling has contributed heavily to surprising spike up in long term Treasury yields.  But who is buying what China is selling?  Japan has been unloading Treasuries every month since July.  On a net basis, foreigners unloaded $116 billion Treasuries in October.  A colleague in the pension industry told me today that pensions are not buying Treasuries because the yield is too low.

Phil and John (Not F) Kennedy invited me on to their engaging and entertaining podcast show to discuss the chaos that has enveloped the global financial markets including the Fed rate hike, the manipulated take-down of gold and silver and the deleterious effects from the spike up in interest rates.

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Adios To The Housing Market

That popping sound you just heard is the Fed popping the housing bubble.  The housing bubble that it inflated with ZIRP and zero-bound credit requirements to qualify for a mortgage.    But first, let’s get this out of the way:  Goldman’s Jan Hatzius – apparently the firm’s chief clown economist commented that the Fed’s “faster pace” of rate hikes reflects an economy close to full employment.  That statement is hand’s down IRD’s winner of “Retarded Comment of the Year by Wall Street.”

I guess if an economic system in which 38% of the working age population is not working can be defined as “full employment” then monkeys are about to crawl of out Janet Yellen’s ass.  I guess we’ve witnessed more stunning events this year…

Before we start assuming the Fed will raise rates three times in 2017, let’s consider that Bernanke’s “taper” speech was delivered in May 2013.  3 1/2 years later, the Fed Funds rate has been nudged up a whopping 50 basis points – one half of one percent.

I hope the Fed does start raising rates toward “normalized” rates, whatever “normalized” is supposed to mean.  Certainly there’s nothing “normalized” about an economic system in which real rates are negative – that is to say, an economic system in which it’s cheaper to borrow money and spend it than it is to save.

Having said all that, put a big pitch-fork into the housing market.  Notwithstanding the highly manipulated “seasonally adjusted annualized rate” data puked on a platter  and served up warm by the National Association of Realtor and the Census Bureau – existing and new home sales data, respectively – the housing market in most areas of the country is deteriorating at an increasing rate.    I review this data extensively and in-dept in my Short Seller’s Journal.

Even just marginally higher mortgage rates will choke off the ability of most buyers to qualify for anything less than an conventional mortgage with 20% down and a 720 or better credit score.   With a rapidly shrinking full-time workforce – the Labor Department reported that last month the economy lost 100,000 full-time jobs – the percentage of the population that has a 720 credit rating and can afford 20% is dwindling rapidly.

The Dow Jones Home Construction index is down 2.5% today.  What will happen to the stocks in that index when the Fed cranks back up it’s “we’re raising again” song and dance?

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Despite the rampant move in the Dow/SPX since the election = while the Dow and SPX were hitting all-time highs almost daily – the momentum was not enough to propel the homebuilder stocks even remotely close to a 52-week high.  Hell, the 50 dma (yellow line) has remained well below the 200 dma (red line) and has not even turned up.  THAT is the market sending a message.

Here’s a weekly version of the same graph that goes back to 2005, when the DJUSHB hit an all-time high:

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When looked at it in that context, one has wonder where this great housing boom has been hiding? The stock market certainly didn’t price in a booming housing market. That’s because the truth is that the housing market since 2008 has been driven by massive Fed and Government intervention. The intervention enabled a segment of the population to buy a home that could not have otherwise afforded to buy a home. It was really not much different than the previous bubble fueled by liar loans and 125% loan-to-value mortgages. As I detailed yesterday, the system is now re-entering a cycle of delinquencies, defaults and foreclosures.

If you are thinking about buying a home – primary, vacation or investment – wait.  You will be happy you waited.  Prices have been pushed up to near-record levels by 3% down payment mortgages and credit assessment that gears the amount of mortgage available to a buyer based on maximizing the monthly payment based on monthly gross income.  That system is over now.  Prices and volume are going to spiral south.

If you need to sell your home, you better list it as soon as possible.  You will find that you will be competing with a surge in new sellers that descend like locusts.  “Price reduced” signs will blossom everywhere.  Just like 2008…

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