Tag Archives: low downpayment mortgages

The Fed’s Everything Bubble And The Inevitable Asset Crash

Do not mistake outcomes for control – remember, there is no such thing as control – there are only probabilities. – Christopher Cole, Artemis Capital

Central Banks globally have created a massive fiat currency fueled asset bubble.  Stock markets are the largest of these bubbles – a bubble  made worse by the Fed’s attempt to harness the “power” of HFT-driven algo trading.  At least for now, the Fed can “control” the stock market by pushing the buttons that unleash hedge fund black box momentum-chasing and retail ETF  buy orders whenever the market is about to head south quickly.

However, the ability to push the stock market higher without a statistically meaningful correction is a statistical “tail-event” in and of itself. The probability that the Fed can continue to control the market like this becomes infinitesimally small. The market becomes like a like a coiled spring. The laws of probability tell us this “spring” is pointing down.

The Fed announced in no uncertain terms that it was going to begin “normalizing” – whatever “normalize” means – its balance sheet beginning in October.  Going back to 1955, the furthest back in time for which the data is readily accessible, the Fed Funds rate has averaged around 6%.  But for the last 9 years, the Fed Funds rate has averaged near-zero.  Back in May 2013 Ben Bernanke threatened the markets with his “taper” speech.  More than four years later the Fed Funds rate is by far closer to near-zero than it is to the 62-year Fed Funds rate average.  Can you imagine what would happen to the stock market if the Fed actually “normalized” its monetary policy by yanking the Fed Funds rate up to its 62-year average of 6%?

In September the Fed announced that it would begin reducing its balance sheet by $10 billion per month starting in October. Before the Fed began printing money unfettered in 2008, its balance sheet was approximately $900 billion.  If we define “normalize” as reducing the Fed’s balance back down to $900 billion, it would take 30 years at $10 billion per month. But wait, the Fed’s balance sheet is going the wrong way.  It has increased in October by $10 billion (at least thru the week ending October 18th).  So much for normalizing.

The Fed is stuck. It has created its own financial Frankenstein. Neither can it continue hiking interest rates nor can it  “normalize” its balance sheet without causing systemically adverse consequences.  The laws of probability and randomness – both of which are closely intertwined – tell us that, at some point, the Fed will lose control of the system regardless of whether or not it decides to keep rates low and maintain the size, more or less, of its balance sheet.

Jason Burack invited me onto his Wall Street For Mainstreet podcast to discuss the Fed’s “Everything Bubble,” why the Fed can’t “normalize” its balance sheet and the unavoidable adverse consequences coming at the system:

 MINING STOCK JOURNAL                           –                SHORT SELLER’S JOURNAL

The Big Short 2.0: The NAR Whiffed Badly This Month

Based on the National Association of Realtor’s “Seasonally Adjusted” Annualized Rate (SAAR) metric, home sales were said to have ticked up 0.7% in September from August. On a SAAR basis they declined 1.5% from September 2016.  In his customary effort to glaze the pig’s lips with lipstick, NAR chief “economist” and salesman, Larry Yun, asserted that sales would have been stronger but for the hurricanes that hit Florida and Texas.

This guy should do some better vetting of the data before he tries to spin a story. The Houston Association of Realtors was out a week earlier stating that Houston home sales were up 14% in September from August and up 4.2% from September 2016. Yun’s fairytale is a stunning contrast to what is being reported from Houston. But it illustrates the fact that the data on housing the NAR reports is highly suspect.

As I’ve been detailing for years, the NAR’s existing home sales report is highly manipulated and flawed.  It works well for the industry and the media in rising markets, but the real estate market has rolled over and is preparing to head south.  Likely rather quickly.  As it turns out, the September existing home sales report released Friday reinforces my view that the market is starting to topple over.  I go over the details in the next issue of the Short Seller’s Journal, with a couple examples which foreshadow a collapse in the over $1,000,000 price segment of the market.  This in turn will affect the entire market.  I always suspected that the “Big Short 2.0” would start at the high-end.  An example outside of Colorado can found here:  Greenwich Sales Plunge.

Four weeks ago I presented a housing-related stock as a short good idea.  The stock is down nearly 10% in four weeks.   How can this be?  Isn’t the housing market hot?  It will be going much lower.  This week I’ll be featuring a housing industry supplier stock that went parabolic and will soon go “cliff dive.”  If you want to find out more about this subscription service, click here:  Short Seller’s Journal info.

I love your Short Seller’s Journal. Keep up the great work – recent new subscriber

Government Sponsored Mortgages Go Full Retard: 2008 Redux-Squared

This is a note to me from one of my Short Seller Journal subscribers:

As a 20 year real estate agent, investor and wholesaler in Atlanta,  I’d like to add my comment to your analysis. I totally agree that things are not what they seem to be in housing.  I despised the NAR [National Association of Realtors] when I was a member because of their “it never rains” housing reports and their confiscatory attitude toward realtor dues and their subversive political activity.  I eventually gave up my agent’s license when they started forced PAC contributions in 2010.  Edward Pinto of the American Enterprise Institute told me that NAR is spending $55 million a year for lobbying on housing issues. The NAR never met a loan they did not like.

I’ve been working the Atlanta metro housing market since the early 1990’s. I can tell you that this time around is different in that the home buyers I’m seeing in entry level FHA neighborhoods are mostly “minorities” (some are refugees), and virtually every neighborhood in my general area northwest of Atlanta is being sold with 100% financing via USDA loans. There is NO equity in these neighborhoods, and most of the selling prices are as high or higher than 2006-07.  The mortgage fees and costs for things like PMI and funding fees are added into the payment along with ever rising tax and insurance payments. The outcome is not going to be pretty.

I do not know when exactly, but at some point, I’m going to make that massive killing in housing stocks that I missed out on in 2009. I knew that crash was coming as early as 2004, from reading mortgage data, but I did not think to short the home builders! This time I won’t miss.   Enjoy your work very much.

There you have it. That’s the truth from the trenches.  “The NAR never met a loan they did not like.”  But guess what?  All these 3% to no percent down payment mortgages are being subsidized by you, the taxpayer.  Instead of Countrywide originating subprime  nuclear waste and dumping it on Wall Street (and into your pension fund), this home finance scatology  is being sponsored by the Government through Fannie Mae, Freddie Mac, the FHA, the VHA and the USDA.

Now Quicken – through Taxpayer-sponsored Freddie Mac – is offering 1% down payment mortgages (LINK) that also avoid the use of PMI insurance.  The PMI insurance is was a requirement for low down payment mortgages (below 20%), but the NAR and other PACs successfully lobbied to have this requirement removed.  The funds from PMI were put into a trust that was used to help cushion blow when low  down payment buyers defaulted.  It was a thin layer of protection for the Taxpayer.  Now that’s been removed.

Most of the homes being sold to actual buyers are now financed with Taxpayer funded subprime mortgages.  If you note in the article about the Quicken product linked above, it references that these are not considered “subprime” mortgages thanks to rule changes.  We can call a “nuclear bomb” a “snow cone” instead, but it’s still a nuclear bomb.

When a buyer closes on a low down payment house, the buyer is underwater on the mortgage after netting all the costs that are included.  Home prices are not going up as reported by Case Shiller and the Government.   Look around at all but the hottest markets and you’ll see a plethora of “price reduced” offerings.

This is going to get ugly again.  Interestingly, I run into lot of people who agree with me that what’s coming will be worse than 2008.   I reiterated a short on a big homebuilder less than two weeks ago that is down almost 9%.  Despite the general upward push in the SPX since mid-Feb, I’ve had several picks that are down double-digits on a percentage basis, including a mortgage company that’s down 15% since late March, a consumer durables stock down 17% since mid-April and an auto seller that’s down over 18% since early June. This is because the Fed is concerned with propping up the Dow and the S&P 500  for propaganda purposes.  But individual stock sectors are melting down.  The home construction and auto sectors will be a blood-bath.

You can access my research with these ideas here:  Short Seller’s Journal.  It’s a weeklyNewSSJ Graphic  report for $20/month delivered to your email on Sundays. In recent issues I’ve been reviewing past ideas that have not worked since mid-Feb because of the Fed’s market intervention. Many are better shorts now than back then, as conditions in the general economy have deteriorated since then.  I also provide at least one new idea per week.

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