Tag Archives: Housing bubble

Goldman to Trump: Situation Assessment, Government Bail-ins, Precious Metals Threat: Systemic Collapse

A guest post from Stewart Dougherty. Stewart included some thoughts in his email to me that I thought should be shared as a preface to his essay:

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Hi Dave:
Some pretty heady stuff, particularly the part about the Fed’s balance sheet being a lie. (I am 100% convinced of this, but cannot prove it, at least not yet.) And remember, Bernanke was caught issuing $10 trillion in swaps to foreign banks, all of which was supposed to remain a complete secret. It is not as if they haven’t been caught doing what I am saying they are still doing, to an even larger degree.

I’ve stated that the “conversation” is imagined, intuited and fictional, so the small living parts of the shredded Constitution might actually protect my freedom of speech; wouldn’t that be amazing.

I believe “government bail-ins” is fresh terminology … people hear about bank bail-ins all the time … but they don’t hear about government bail-ins, which are going to affect far more people and are inevitable. (As I’ll explain in Part 2, government bail-ins are not going to be about taxes … tax increases are too slow, and oftentimes don’t even work.) Since it’s new, the term government bail-ins might gain a lot of attention.

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Despite Goldman’s avid support for Hillary Clinton, fewer than three weeks after the election, Gary Cohn, the number two executive at Goldman Sachs met privately at Trump Tower with the President-elect. Ten days later, he was named to one of the most powerful financial positions in the world, Director of the National Economic Council of the United States of America.

As they say, knowledge is power, and power is knowledge; both open doors, ears and minds when they decide to. What could Cohn have said to Trump that resulted in his near-immediate hire? Using the Inferential Analytics methodology, we have synthesized a message a visitor of Cohn’s stature might have conveyed to Trump on November 29, 2016. And while it is inferred, intuited and fictional, the following transcript is deeply grounded in the nation’s current and prospective fiscal, financial, monetary and economic situation.

The Visitor: “I appreciate your invitation and it is a pleasure to meet with you today. Permit me to convey Lloyd’s congratulations. He would like to assure you that you have Goldman’s full support going forward.

“Our time is short, so I will give you a very high level situation assessment. Thousands of person hours and millions of dollars’ worth of research and analysis stand behind each of the themes I will touch on, and we can provide additional details if you wish. As one of the U.S. government’s closest financial allies for decades, particularly when it comes to the placement of the nation’s sovereign debt, we have a deep understanding of the financial dynamics at work. When I use the term “we,” it is because Goldman and the United States government have been close business partners for many years.

“As you correctly stated to the American people during your campaign, the situation is not good. It is containable at this time, but only if we continue to run substantial deficits and create large sums of new dollars, in other words, debt. With all due respect, we believe the U.S. government is going to need our help as never before in the coming months and years.

“I will briefly touch on nine topics. There are others we could discuss, but these tell the most important part of the tale. They are: 1) Deficits; 2) Debt; 3) Reporting; 4) War; 5) Perception; 6) Stocks; 7) Money Creation; 8) Currency; and, 9) Precious Metals.

“As you may know, I started my financial career as a Comex trader, and Lloyd began his as a gold dealer at J. Aron, which was acquired by Goldman. We both have extensive experience in the Precious Metals markets, and believe they are going to be of incalculable significance in the near future. I will review this topic later.

“All I ask is that you not shoot the messenger. Much of what I tell you is troubling.

“First, the deficits are structurally non-containable. The OMB itself confirms this, projecting escalating deficits for the next 50 years, with not one year of surplus during that entire time. The aggregate deficit during the next decade alone will be at least $10 trillion. If there is a slowdown or recession, it will be greater or even much greater. The deficits can only be reined by a massive political reset and wholesale reneging on the entire social contract, including Medicare, Social Security, public pensions and welfare. Such a reset would result in an economic collapse. Therefore, it is not feasible, although it could be forced upon us by endogenous or exogenous events that would take the situation out of our hands.

“The debt has gone vertical, rising from $10 to $20 trillion in eight years. Obama created more debt than all other presidents in the previous 230 years, combined. This amount does not include the federal government’s net, unfunded liabilities, which are an additional $150+ trillion, and growing by trillions per year on a GAAP accounting basis. Please understand that his shadow, unfunded debt is net of projected tax receipts; in other words, it is completely out of control.

“Debt is now increasing at an accelerating rate, with $1.4 trillion added last year alone. This debt can never be paid in future dollars having value anywhere even close to today’s, but for now at least, we are still able to peddle it. We do know that for us to successfully distribute the debt in the future, interest rates will have to go higher, which will compound the fundamental deficit and debt problems. Otherwise, we will have to print money on a scale never before seen, which will further damage the value of the dollar. There is a limit to how badly currencies can be damaged; they can and do go into freefall. Several are, as we speak.

“The so-called economic recovery has been false. The Obama administration, with the full support of the Fed created $10 trillion in counterfeit dollars and threw them at the economy, funding everything including non-stop wars, Food Stamps, a vast expansion of government, subsidized Obamacare, solar panel cronies, fund-raising and golf trips, you name it. It’s all included in the nation’s deliberately and, frankly, fraudulently inflated GDP. We understand; it had to be done, and we helped make it happen by being expert debt pushers.

“Some like to think that we can grow our way out of the deficits and debt, but our analysis disagrees. Assume 4% GDP growth. Given an $18 trillion economy (ours is not, as explained above, but let’s say it is), 4% growth means a GDP increase of $720 billion in Year 1. Let’s say the federal government is able to collect in taxes 25% of the gross GDP increase, a wildly optimistic assumption. That would produce $180 billion in incremental revenue. But the structural deficits, as reflected by the increases in debt, exceed $1 trillion per year. Even 4% GDP growth will hardly make a dent in the fiscal hemorrhaging. And to prime the pump for such growth, the government will have to spend a few hundred billion dollars per year on infrastructure spending and the like. This will fully negate the incremental taxes. So we have to dig a deeper fiscal hole for the privilege of digging an ever deeper fiscal hole.

“This leads to topic #3, Reporting. At this point, out of necessity, virtually every government economic statistic ranges from being “massaged” to outright false. GDP is particularly misleading. If we deducted government deficit spending and the multiplier effects it creates, the United States economy would immediately collapse. If that were to happen, we cannot credibly forecast a scenario that would restore it to growth. Economically, it would constitute an existential event.

“Obviously, we cannot openly admit the reality of the situation, or even let it become known. Therefore, the government must doctor the reports. Given the interrelationships among economic reports, we now have to lie about everything. If we just lied about certain metrics, say, GDP and employment, then the other metrics, if not similarly fabricated, would contradict the fabricated reports. We would be unable to explain the inconsistencies and contradictions. We have to lie about unemployment, GDP growth, retail sales, wages, money supply, the cost of Obamacare subsidies, current deficits, current debt, the true fiscal trajectory of Medicare, Medicaid and Social Security, government pension underfunding, projected deficits and debt, and all the rest. When it comes to false reporting, we’re in a box; there’s no alternative to it.

“This is one reason why the Alternative Media are so dangerous to us, and why we need to eliminate them. There are many talented analysts in that domain. They know the truth, and that we’re not telling it. The fact is that fake news comes from us, not them, as they are revealing to a growing army of citizens.

“In addition to false reporting, there is War. War is just like the Fed; it is never audited. This deliberate lack of oversight is how $6 trillion can go missing at the Army, alone. The Army’s missing funds are a small portion of the total amount that has disappeared into the military spending vortex. War spending is critical to topline GDP, and we can play a lot of non-detectible games with it. The saying, “War is the health of the state,” was coined for us. If we stopped fighting wars, GDP would crater. Wars are a necessary constant going forward, even if we have to invent them.

“This brings us to Perception, one of the most important factors of all. In reality, the economy and dollar have become a confidence game. We know that if confidence in an inherently dysfunctional system is lost, only a reset plus time can restore it. But as we discussed earlier, a reset is socially, politically and economically impossible. If the 200,000,000 U.S. citizens currently dependent upon the government to some degree were deprived of even a fraction of their payments, economic and social entropy would result. In fact, the people want more, not less. Free college; free or massively subsidized health care; a $15 minimum wage; the list goes on. Politicians have told them they can have these things, so there is a vast disconnect between popular expectations and fiscal reality.

“Stock market indices are one of the few tools we can use to create positive perceptions. We have successfully created a false perception of economic health by taking stocks to new highs. We have also deliberately engineered a “wealth effect,” which has artificially spurred spending and GDP, and boosted the so-called “animal spirits.” Doing these things has disguised reality and bought us a lot of time.

“But the real reasons we have manipulated stock markets higher go further. First, without a levitated stock market, the pension funds would collapse. Which would ripple through the economy in a massively destructive way.

“Second, federal, state and local governments need the capital gains-related tax revenue produced by the artificially propped-up stock markets. Dow 20,000 will produce a 2017 tax windfall, which is required to offset the damaged economy’s tax shortfalls. The stock markets are a crucial money machine when it comes to tax generation.

“Now to money creation, which takes us deep into the Dark Side. To fund the massive deficits and levitate the stock market, we have had to create trillions of new dollars. But if the actual amount were revealed, confidence in and the value of the dollar would collapse. So we have to lie about this, too. The Fed’s balance sheet is actually trillions more dollars than what is reported.

“We inject newly digitized currency into the system by crediting trusted, proven collaborators such as the BOE, BOJ and Bank of Israel with dollar amounts that can range into the trillions, depending upon circumstances. These collaborators use a portion of these credits to buy our stocks and bonds, in accordance with strict timing, allocation and dollar amount instructions. They funnel the remainder of the funds to trusted, third-party actors, including hedge funds, merchant banks and dark pool operators, providing them, too, with specific deployment instructions. Therefore, the buying comes from many different markets and locations, which makes it look normal and legitimate.

“What exists is a small club of trusted players who deploy enormous sums of money, all of it counterfeit and undocumented, to support the positive perception, healthy GDP and strong stock market agendas. This money costs our partners nothing; we create it for them, out of nothing. The fact is that management of the dollar is far more clandestine than any of the operations conducted by the CIA or NSA, and the Fed is the most secretive and sophisticated intelligence agency on earth. Geo-financial hegemony is its mission, and dollars are its spies, operating, misdirecting and deceiving from the shadows every minute of every day, all over the world.

“While a large and increasing number of citizens now demonstrate broad skepticism about government institutions, they still have blind faith in the statistics reported by the Fed. Which is upside down, because the Fed’s figures are the most dishonest of them all. It proves the power of propaganda, particularly when billions of dollars are spent on it. If the Fed were subject to audit, which of course it deliberately and necessarily is not, none of this would be possible. And if the true size, composition and deployment of the Fed’s balance sheet were known, the entire global financial system would implode.

“That is the situation, in a nutshell. As you can see, it is fragile and untenable. We can continue to manage it in the current context, but if the context were to change, even in small ways, it could all come down. We have to prevent that at any cost because if it does come down, even our most sophisticated computer simulations cannot posit a scenario by which it could be propped back up.

There is a subtle knock on the office door. Trump realizes he is out of time. He says to his guest, “I understand what you have said, and need you to come back and finish.” They arrange for the visitor to return in three days, December 2nd. Trump asks, “So we can move as fast as possible then, please give me a brief outline of what we will discuss.”

The visitor responds: “Most people do not think about these issues at all, but the sophisticated ones do. We have deliberately misdirected that cohort’s attention. We have distracted them with talk of bank bail-ins and other financial gossip to keep their thinking off of what is actually a much more profound and necessary outcome: government bail-ins. We have before us a complex, four dimensional puzzle, in which the puzzle pieces represent events wrapped in time. Both the controlling elite and the people are putting the puzzle pieces in place as fast as they can, because they know their futures depend on it. The side that first completes and comprehends the puzzle will win; the other side will lose. Two of the most important puzzle pieces are currency and precious metals, both swaddled in time. Which is running out for one side or the other.”

[To be continued in Part 2]

Stewart Dougherty is the creator of Inferential Analytics (IA), a forecasting method that applies to events proprietary, time-tested principles of human instinct, desire and action. In his view, forecasting methods not fundamentally based upon principles of human action are unlikely to be reliable over time. He is a graduate of Tufts University (BA) and Harvard Business School (MBA), is a 35+ year veteran of the business trenches and has developed IA over a period of 15+ years.

Housing Starts Crash – Sales Volume And Prices To Follow

In many areas of the country prices are already down 5-10%.   I know, you’re going to say that offer prices are not reflecting that.  But talk to the developers of NYC and SF condos who are trying to unload growing inventory. Douglas Elliman did a study of NYC resales released in October and found that resale volume was down 20% in the third quarter vs. Q3 2015.  A report out in November published by Housing Wire said that home sales volume in the SF Bay area fell 10.3% in the first 9 months of 2016 vs. 2015. Price follows volume and inventory is piling up.

NYC led the popping of the big housing bubble.  It will this time too.  Prices in the “famed” Hampton resort area down 20% on average and some case down as much as 50% from unrealistic offering prices.  Delinquencies and defaults are rising as well.  While the mainstream media reported that foreclosures hit a post-crisis low in October, not reported by the mainstream media is that delinquencies, defaults and foreclosure starts are spiking up. Foreclosure starts in Colorado were up 65% from September to October.

Housing starts for November were reported today to have crashed 18.7% from October led by a 44% collapse in multi-family starts.  No surprise there.  Denver, one of the hottest marekts in the country over the last few years with 11k people per month moving here, is experiencing a massive pile-up in new building apartment inventory.   I got a flyer in the mail last week advertising a new luxury building offering 2 months free rent and free parking plus some other incentives.   Readers and subscribers from all over the country are reporting similar conditions in their market.  Yes, I know some small pockets around the country may still be “hot,” but if you live in one of those areas email me with what you are seeing by June.

Here’s a preview of some of the content in Sunday’s Short Seller’s Journal (click to enlarge):

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The graph above is from the NAHB’s website that shows its homebuilder “sentimement” index plotted against single-family housing starts. You’ll note the tight correlation except in times of irrational exuberance exhibited by builders. You’ll note that starts crash when exuberance is at a peak. Exuberance by builders hit a high in November not seen since 2005…here’s how it translated in the homebuilder stocks:

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Note the crash in housing stocks a few months after homebuilder “sentiment” index peaked.  From a fundamental standpoint, the homebuilders are more overvalued now than they were in 2005 in terms of enterprise value to unit sales.  This because debt and inventory levels at just about every major homebuilder is as high or higher now than it was in 2005 BUT unit sales volume is roughly 50% of the volume at the 2005 peak.  The equities are set up of another spectacular sell-off.

Refi and purchase mortgage applications are getting crushed with mortgage rates up only 1% from the all-time lows.  What will happen when mortgage rates “normalize” – i.e. blow out another 3-5%?

The next issue of the Short Seller’s Journal will include a lot more detail on the housing market and some surprisingly bearish numbers on retail sales this holiday season to date. You can find out more about the SSJ by clicking on this link: Short Seller’s Journal subscription link. 

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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A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th.   30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:

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The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index.  I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:

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The data is through December 2nd, as mortgage application data lags by a week.  As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows.  This is not unexpected.  Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing.  Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.  Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor”   that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials.   Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept.  On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%.  – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt.  In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage.   This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago.  If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file.  I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the most widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports).  The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable.   But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index.  I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication.  I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites.  I also present short-sell ideas, including recommendations for using options.   Despite the run-up in the broad market indices, there’s stocks everyday that blow-up.  Last Restoration Hardware plunged 18% after reporting its earnings.   You can subscribe to the Short Seller’s Journal by clicking on this link:  SSJ Subscription.   It’s monthly recurring and there is not a minimum number of months required.

The Housing Market Is Unraveling

You wouldn’t know it from the housing industry organizations, Wall Street or the media propaganda, but the housing market is starting to unravel. It does not matter which person or political party occupies the White House and Capitol Hill. The debt orgy that followed the Fed’s QE program is now showing visible signs of unintended but inevitable consequences and it’s beginning smell a lot like 2008.

Per RealtyTrac, U.S. foreclosure activity increased 27% from September to October. Foreclose starts posted the biggest monthly increase since…December 2008.  Scheduled foreclosure auctions posted the biggest monthly increase since 2006.  The data is even more startling in certain States.  Foreclosures in Colorado jumped 64% in October from September and foreclosure starts soared 71%.   Colorado tends to be an economic and demographic bellweather State.  In the housing bubble 1.0, foreclosure activity in Colorado began to accelerate before it hit all the other major MSAs.

Just in time for foreclose activity to ramp up, the Obama Government rolled new Fannie and Freddie mortgage programs which removed or reduced required mortgage insurance. Once again the Taxpayers will be left holding the bag and monetizing a mortgage collapse from which the bankers, real estate and mortgage industry collected $100’s of millions in fee money.

Per this analysis posted by Wolf Richter, the Miami condo market is in a freefall:  LINK. Mortgage rates have spiked up considerably in the last week.  This will extinguish a significant amount of home sales and cash-out refi’s  – note – the following is an excerpt from the latest issue of my  Short Seller’s Journal :

untitledI continue to see with my own eyeballs, which I trust a lot more than the manipulated b.s. reported by the National Association of Realtors and the Government’s Census Bureau, a stunning number of “for sale” and “for rent” signs all around central Denver. Note that Colorado has 11,000 people per month moving here, so if inventory in both homes for sale and rentals are visibly increasing here it means they are increasing everywhere.

I’ve heard horror stories about the south Florida market from several sources. A colleague who runs a real estate brokerage firm in Houston published a report last week on a growing glut in luxury apartments in Houston:  LINK.

I bought Toll Brothers (TOL) December $28-strike puts on Thursday for 64 cents. The stock at the time was $29.40. It closed Friday at $28.25. I also bought Pulte Home (PHM) January $18-strike puts for 72 cents. The stock at the time was $18.65. It closed Friday at $18.32.

I did this after chatting with the friend of mine mentioned earlier who is a mortgage broker. We are working on a refi for my significant other, which is why he called me on Thursday to see if I wanted to rate-lock her loan after informing me that the mortgage market was getting “funky” and spreads were widening.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year.

DR Horton (DHI) reported earnings on Tuesday. It missed both revenues and earnings. The stock was hit 5.4% that day and closed even lower by Friday. Any stock that sold off on Thursday and Friday while the stock market was going orbital has real problems. DHI reported the slowest order growth rate in three years. More troubling from my perspective is that, with the market obviously slowing down, DHI’s inventories continue to balloon, increasing by $537 million to $8.3 billion vs $7.8 billion at the end of September 2015. The Company’s cancellation rate jumped to 28% from 23% last year. Again, this smells exactly like 2008…perhaps this part of the reason the Dow Jones Home Construction index looks so ugly:

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The graph above shows the Dow Jones Home Construction index vs the S&P 500 for the past year. Since hitting 601 on July 26, the index is down 14%. It’s down 16.5% from its 52 week high of 618 on December 1, 2015. As you can see, the index is below both its 50 and 200 dma’s (yellow line and red line, respectively). The 50 dma is about to cross below the 200 dma, another potentially highly bearish techincal indicator. Perhaps first and foremost is the fact that the homebuilders were extremely weak relative to the buying frenzy that gripped the market Wed thru Friday.

In my opinion, it’s safe to put a fork in the housing market. And this is the primary reason that it smells to me a lot like 2008.

You can access  the Short Seller’s Journal with this LINK or by clicking on the graphic to the right.  Almost all of the ideas I have presented since NewSSJ Graphicearly August have been working, some have been yielding tremendous returns.   It’s a weekly report for $20/month with no minimum subscription requirement.  I provide options trading ideas as well as disclose all of my trading activity from the short-side.

A Bear Market In Stocks Began In May 2015

Technically, the move in the stock market that began in March 2009, when the stock market bottomed after the 2008 financial market de facto collapse, should not be termed a “bull market” because it required several trillions of Central Bank and Government intervention to move the stock market.   Definitionally the stock market is no longer a “market” – rather it’s an intervention.

Having said that, with the entire financial world – especially Wall Street analysts and financial  media boobs – focused on the S&P 500 and the Dow, the NYSE Composite, which covers every stock traded on the NYSE, has begun what is likely a bear market that started from its record high of 11,254 on May 21, 2015:

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As the graph above illustrates, the NYSE Composite index – every stock that trades on NYSE – is down close to 6% since May 2015.  The NYSE Comp is more representative of the stock and more reflective of the deteriorating conditions in the economy than are the SPX and Dow, which are used as propaganda tools by the financial market and political elitists.

In fact, as has been demonstrated in several places in the alternative media, as it turns out just a handful of the largest cap stocks are keeping the SPX and Dow in what appears to be a “bull market.”    This graph below sourced from Zerohedge shows the performance of the SPX with and without the infamous “FANG” stocks (FB, AMZN, NFLX, GOOG):

As you can see if you strip out the FANG stocks from the calculation of the SPX index, the index is flat going back to the beginning of 2015. Yet, the SPX hit an all-time high in August 2015. Qu’est-ce que c’est?  As explained in the ZH article:   The FANGS “have gained $570 billion of market cap or nearly 80% during the previous 19 months” [Jan 2015 – Aug 2016]…”if you subtract the FANGs from the S&P 500 market cap total, there had been virtually no gain in value at all.”

I wrote to my Short Seller Journal subscribers this past weekend:

NYA began diverging from the SPX and the Dow back then. It points to broad overall weakness in the stock market relative to the biggest stocks by market cap. This pattern in the broader stock market is also more reflective of the economic reality of a deteriorating economy. Small and mid-sized companies are experiencing deteriorating fundamentals which is translating into deteriorating market caps.  SSJ for October 16, 2016

The point here is that economic reality is diverging from the propaganda infused message that the Fed, Wall Street and politicians want us to buy into.  The housing market illustrates this perfectly.  I have been detailing in my blog the methodology by which the Government manipulates the new home sales statistics.  This morning it was reported that housing starts for September plunged 9% from August.  Of course the media puts its propaganda spin on this. For instance, Bloomberg attributes the drop to multifamily starts. But multifamily starts is the metric that gave the housing starts report any “legs” to begin with.  Marketwatch references a “durable recovery.”  But does this look like a durable recovery?

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New single family home sales – despite the trillions of dollars infused into the housing market by the Federal Reserve and Government – never got any higher than where they were in 2008 after the housing bubble popped and sales had already dropped by 66%. Before that, the last time single family home sales were at Marketwatch’s “durable recovery” level was in 1995!

And in truth the methodology used by the Government to present new  home sales (Seasonally adjusted annualized rate based on highly questionable Census Bureau data collecting) grossly overstates the true level of new home sales at any given time.  The same can be said for the NAR’s existing home sales.  Like everything else in our system, the housing market activity is primarily a product of the propaganda and not real economic activity.

The point here is that underlying economy is far weaker than the propaganda coming from the elitists would have us believe.  They can stimulate fraud and deception all they want but ultimately they can not force a shrinking middle class with rapidly shrinking disposable income from spending money.

More important, you can make money from this insight because most stocks in the stock market have been going lower since mid-2015.  This pattern in the broader stock market is also more reflective of the economic reality of a deteriorating economy. Small and mid-sized companies are experiencing deteriorating fundamentals which is translating into deteriorating deteriorating market caps (from the latest Short Sellers Journal)

Every week I provide proprietary insight into the economy and markets in the Short Seller’s Journal.  I also highlight at least two or three short-sell ideas.   Most of these ideas have been working now since early August (late Fed to late July was rough).  As an example, in the September 18th issue I presented Credit Acceptance Corp, a subprime auto loan finance company with a balance sheet that is a ticking time bomb, with the stock at $198.60.   It’s trading today at $183 – down 7.8% in less than 4 weeks – despite a largely flat SPX in that timeframe.  CACC will eventually be cut in half from here, at least.

SSJ is a monthly subscription that is published weekly.  I also provide some ideas for using puts if you are not comfortable shorting stocks and I also disclose when I participate in the ideas in my own account.  You can cancel at any time – there is no minimum commitment. You can access more information on the subscription here:  Short Seller’s Journal.

Here’s another example of the insight and analysis provided in the SSJ:

Another interesting report out last was China’s exports for September, which were down 10% year over year in September vs. -3.3 expected. The US and Europe are China’s largest export markets. If China’s overall exports dropped 10%, it’s mathematically probable that US and EU imports from China were down more than 10% in September. It also implies and reinforces the thesis that US consumer spending is contracting (of course, if this drop in exports from China translates into a narrowed trade deficit for the US, that will be spun as a positive by the financial media!)

IRD On Kennedy Financial: Janet Yellen Is A Complete Embarrassment

Predictably, the FOMC once again fell flat on its face with regard to its continuous threats over the last month to hike rates. Despite the politically motivated rhetoric about the strengthening economy and tight labor market flowing from Yellen’s pie-hole, the fact that the Fed is afraid to raise rates just one-quarter of one percent tells us all we need to know about the true condition of the economy.

If I didn’t despise the fact that Yellen has been an incompetent political hack originally inserted into the Federal Reserve system as a political tool since her first tenure as an economist at the Fed in 1978, I would almost feel sorry for her. But the fact that she can stand in front of the public and read off of a sheet of paper scripted with lies about the state of the economy forces me to despise her as much as I despise the entirety of Washington, DC

This analysis of Yellen underscores my view that Yellen is either tragically corrupt or catastrophically stupid:  How Yellen Rationalizes Financial Bubbles

Phil and John Kennedy invited onto their podcast show to discuss the FOMC, Yellen, Gold, Deutsche Bank and some other timely topics:

mining-stock-journal-bannerNewSSJ Graphic

The Economy: It’s Worse Than I Thought

I got an email from a colleague today that said, among other things:  “The economy is tanking and, while you may be the most pessimistic around, you may not be pessimistic enough.”

To that I would say that I’m significantly more bearish than is reflected in my public analysis.  I spoke to a couple people today who offered anecdotal stories about their particular business niches – businesses in which new orders are somewhat tied to discretionary spending – and they both said that new business activity is unusually slow and that the last time they experienced new order flow this slow this was in 2008.

I’ve been suggesting for most of this year that retail sales were slowing and would fall off a cliff heading into fall.  I presented RL as a short idea in my Short Seller’s Journal on August 14th at $108 after visiting the Ralph Lauren store in Aspen.  I was the only person in the entire store and I was being hounded by the salesperson to the point of being uncomfortable.  RL is at $100.80 as I write this, which is a 7.2% ROR in 4 weeks for anyone who shorted the stock.  Based on the point of last trade and where I recommended them, the January 2017 $85-strike puts are up 35% – so far.  But the bigger gains will be made holding RL short when it drops to $40, where it was in early 2009 before the Fed’s money printing stimulated credit-induced retail spending.

My outlook on retail is supported by the BAC credit card spending report posted in Zerohedge today.  Based on BAC “aggregate card data,” retail sales ex-autos declined .1% in August from July and .3% in July from June.  The 3-month average (Jun-Aug) is down .2%. These numbers are “seasonally adjusted,” which means the actuals are probably worse.   BAC’s data for department store sales show that they’re down 4.6% year over year in August.  Autopart sales are in a downtrend and beginning to comp negatively.  Auto parts sales are highly correlated with  vehicle unit sales, which are entering a downturn based on July and August numbers, especially if you strip out Chrysler’s fraudulent sales numbers LINK.

The week retail sales reflect the deteriorating income and financial status of the average American household.  And so do restaurant sales.  Restaurant industry sales tracked by Black Box Intelligence show a .6% decline in August in same store sales were down .6% but same store traffic was down 2.7%. This was the third consecutive month same-store sales declined, with monthly sequential declines in 6 out of 8 months this year.

It’s expected that Q3 corporate earnings will once again decline from Q2.  This will be six quarters in a row that earnings drop.  But it’s even worse than that because the changes to accounting standards (GAAP) have enabled companies to manipulate their earnings reports to the upside.  Despite those accounting gimmicks, earnings continue to drop.

The stimulative effects of the Fed’s money printing program have faded.  The subprime debt default crisis that plagued the housing market in 2008 has been replaced by a general reflation of subprime credit issuance that includes housing, autos, student loans and personal loans.  Synchrony, formerly GE Capital Retail Bank, is advertising a  high yield savings account that pays 1.1% interest, or 8x the national average.  That’s because Synchrony is using depositor money to fund a plethora of high interest rate consumer lending platforms which primarily appeal to subprime borrowers.   I would strongly advise avoiding this savings account because, even with alleged FDIC coverage, you might not see your money when Synchrony impales itself on the toxic loans it makes.  Look for Synchrony to blow up sometime in the next 24 months.  Same with Capitol One,  Ally Financial and Credit Acceptance Corporation, among others.

The Fed will not  only not raise rates this year – or anytime in the foreseeable future for that matter – but watch for signs that another big dose of “QE” is being tee’d up.  Otherwise our financial system and economy is headed into that same abyss into which it stared in 2008.

The Economy Is Tanking

The FOMC can raise interest rates any time it desires, without prior approval from anyone outside the Fed. Accordingly, the ncreased hype primarily has to be aimed at manipulating the various markets, such as propping the U.S. dollar. Separately, it remains highly unusual, and it is not politic, for the FederalReserve to change monetary policy immediately before a presidential election. – John Williams, Shadowstats.com

The March non-farm employment report originally reported that 215,000 jobs were created (ignore the number of workers who left the labor force).  But five months later the BLS released “benchmark” revisions which took that original number down by 150,000.  However, the BLS reports a 74,000 upward revision to Government payrolls, which means that non-Government payrolls were down 240,000 in March.  So much for the strong jobs recovery…

A report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out two weeks ago that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.   Heavy trucking is one of the “heart monitors” of economic activity.

Another datapoint that you might not have seen because it was not reported in the mainstream financial media: the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the 5th month in a row in July. The rise attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

Again, I believe that evidence supporting the view that housing and autos are starting to tank is overwhelming. Last week Zerohedge featured an article with data that showed that prices in NYC’s lower price tiers are starting to fall, following the same path as the high-end market there LINK. I want to reiterate that I’m seeing the exact same occurrence in Denver in the mid/upper-mid price segment. Furthermore, I’m seeing “for sale” and “for rent” signs pile up all over Denver proper and I’m seeing “for sale” signs in suburban areas where, up until July, homes were sold as soon as a broker got the listing. NYC, Denver and some other hot areas in the last bubble began to fall ahead of the rest of the country.  I don’t care what the National Association of Realtors claims about the level of existing home inventory, their numbers are highly flawed and the inventory of homes on the market is ballooning – quickly.

I like to describe housing as “chunky,” low liquidity assets. It takes a lot of “energy” to get directional momentum started. Once it starts, it eventually turns into a “runaway freight train.” We saw the upside of this dynamic culminate over the last 6-9 months. But now that freight train is slowly cresting and will soon be headed “downhill.” I don’t think this dynamic can be reversed without extraordinary interventionary measures, even larger than 2008, from the Fed and the Government.

As for autos, I detailed the case that auto sales are heading south in previous blog posts. However, Ford disclosed in its 10-Q filing that charges for credit losses on its loan portfolio increased 34% in the first half of 2016 vs. 2015. GM’s credit loss allowances increased 14% vs. 2015. As credit losses pile up in auto-lender portfolios and in auto loan-backed securities, lenders will begin to constrict their auto sales lending activities. It will be an ugly downward spiral that will send negative shock-waves throughout the entire economy.

I find it highly improbable that the stock market will not continue lower unless the Fed steps in to prevent it.  The Fed is playing “good cop/bad cap” with its rate hike theatrics.  As John Williams points out, it does not require a formal FOMC meeting for the Fed to raise or lower interest rates.  In fact, there’s precedence for inter-FOMC pow wow interest rate changes.   This entire Kabuki theater is designed to support the dollar ahead of yet another meeting in which Fed stands still on rates.   Honestly, even a quarter point hike could act like dynamite on the financial weapons of mass destruction hidden on and off bank balance sheets.  The fraud at Wells Fargo is just the tip of the ice-berg.

The short-sell ideas I present in IRD’s Short Seller’s Journal have worked out of the gate four weeks in a row.  The last time SSJ had a streak like this was during the early 2016 sell-off.  Although my ideas are meant to be long-term fundamental shorts based on flawed business models and deteriorating business conditions, a couple of those ideas are down over 10% in less than a month.  I’m also sharing my strategies with the homebuilders, all of which will be trading under $10 within the next 18-24 months (except maybe NVR.

You can access the Short Seller’s Journal here:   SSJ Subscription.  This is a weekly report in which I present my view of the markets, supported with economic data and analysis you might not find readily in the alternative media and never in the mainstream media.  It’s a monthly recurring subscription you can cancel anytime.   Subscribers can access IRD’s Mining Stock Journal for half-price.

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The Stock Market Veers Further From Economic Reality Each Day

Actual Monthly Change in August Payrolls Likely Was a Contraction – Though Bloated by Seasonal-Factor Distortions and Add-Factors, Annual Payroll Growth Effectively Held at a 30-Month Low – Second-Quarter Real Merchandise Trade Deficit Remained Worst Since 2007.  – John Williams, Shadowstats.com

The negative economic news continues to spill out, with most economic reports reflecting an economy that is already in contraction (recession). The most interesting report out last week was auto sales for July, which showed a 5.5% drop from June overall and a 6.2% drop for domestic vehicles. These comps are based on seasonally “adjusted” annualized rates. I would bet anything that the actual number of cars sold in July vs. June were a lot lower. Ford reported an 8.4% drop in sales. Ford admitted that the market was soft and that retail price incentives are at historical highs. In short, the overall auto sales report was a disaster and it’s going to get worse going forward.

With regard to the transports index, a report out on August 19th that received no attention in the financial media showed that Class 8 (heavy duty) truck orders fell 20% from June and 58% year over year. This is after hitting a four-year low in June. The big drop was blamed on a high rate of cancellations. This is consistent with regional Fed manufacturing reports out last week that showed big drops in new orders. Again, the economy is starting contract – in some areas rather quickly.

One last datapoint that you might not have seen because it was not reported in the mainstream financial media, or even Zerohedge:  the delinquency rate for CMBS – commercial mortgage-backed securities – rose for the the 5th month in a row in July. The rise was attributed to “another slew of balloon defaults.” Balloon defaults occur when the mortgagee is unable to make payments on mortgages that are designed with low up-front payments that reset to higher payments at a certain point in the life of the mortgage. This reflects an increasing inability of tenants in office, retail and multi-family real estate to make their monthly payments.

The housing market is going to crash again.  Vancouver home sales crashed 23% in one month – LINK.   Think this can’t happen in the U.S.?  Think again because, as I detailed in a previous post,  home sales in Aspen and the Hamptons have crashed 50% this summer. In this post – LINK  – I presented data from Redfin which showed home sales in July fell 46% in Vegas, 24% in Miami, 21% in Portland, 20% in Oakland and 11% in Denver.

The entities that report housing and auto sales can hide the truth about monthly sales volume using seasonally adjusted annualized rate metrics, but they can’t simulate actual economic activity with fake data.  Eventually reality catches up.  Go drive around areas where you live that use to be “hot” housing  markets.  I bet  you’ll see a lot of “for sale,” “for rent” and “price reduced” signs.  I am seeing that all over Denver and I’m starting to see it in the formerly “hot” suburban areas.

I have no problem betting on housing with my own capital.  My homebuilder short positions are the highest they’ve been since 2008.  Unless the Government starts pushing 0% down payment mortgages in general, vs. through programs sponsored by the USDA and VHA, the housing market is hitting a stiff wall in Q4.

The stock market is going to have to break one way or another.  Below is 60-minute, intra-day chart of the S&P 500 that I have been posting in my weekly Short Seller’s Journal (click to enlarge):

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I just don’t think the S&P 500 can continue in this “holding” pattern much longer. Some think the Fed is holding up the market until after the election. I don’t know if that’s true or even possible. It’s my view that, unless the Fed engages in another massive round of money printing, at some point it’s going to lose its ability to keep the market from turning south violently.  By the way, because of what you see in the graphic above, puts on most stocks, especially homebuilder stocks, are very cheap right now.  Buy cheap and sell dear.

Even though the Fed is obviously propping up the S&P 500 and Dow, several sub-sectors of the market are heading lower.   Housing, retail, transports and financials are just a few. Interestingly, the last four short ideas presented in my Short Seller’s Journal have worked right out of the gate.  This type of winning streak has not occurred since late December. Regardless of whether my ideas work immediately or take a few months to develop, most of them will work better than shorting the SPX over the next several months/years.  You can access the Short Seller’s Journal this link:  SSJ Subscription.