Tag Archives: mortgage rates

The Stock Market Is Back In Idiot-Mode Again

I don’t know if it was the intent of the Fed, but Jerome Powell has managed to trigger a rush into stocks more frenzied than the one that engulfed the last days of the dot.com/techbubble. The vertical ascent since Christmas in the Dow/SPX is unprecedented on a percentage basis over an 8-week period of time. All sense of logic, sound analysis and fear of risk has disappeared. I don’t know how much longer this move will last, but it will likely be followed by a spectacular reversal.

What I can say with 100% certainty is that the stock market continues to dislocate from economic reality. This is a situation that will be corrected sooner or later, with the stock market re-pricing significantly lower to a level that better reflects the deterioration in both the global and U.S. economy.

A perfect example of this is housing starts, which were released today for December and showed an 11.2% drop from November. The better comparison is the 11% plunge from December 2017, as “seasonal [statistical] adjustments” are used to obfuscate the real data trends month to month. The year/year comp is somewhat “cleansed” from “seasonal” manipulation adjustments.

The mainstream media is already putting a positive spin the starts number by explaining that permits rose. A permit is not indicative of a future start. Homebuilders have been loading up on land, as tends to happen at the end of housing cycles. A permit is a cheap “option” to initiate a start if the market picks up. In fact, starts should be increasing right now. It takes 3-5 months to build the average priced new home. If homebuilders truly thought that the market was going to improve, housing starts should be increasing in November/December in anticipation of peak selling season in June.

Funny thing about the housing starts commentary.  Most homebuilders are sitting on a record level of inventory.  An example is LGI Homes, which just reported this morning.  LGI’s  year-end inventory soared 34% from year-end 2017.  The Company financed most of this with debt.  Home closings for 2018 were up 11% but decelerated during the year and new orders were down in January 2019 vs 2018.  Given the big jump in existing home inventory during the 2nd half of 2018, it’s safe to say that most homebuilders will likely try to work off existing inventory before starting new homes in excess of what is sold.

The housing market and all the related economic activity connected to building, selling, and financing home sales represents  20-25% of the GDP.  Inflating the money supply and dropping interest rates is not a valid method of stimulating economic activity when most households are over-burdened with debt, living paycheck to paycheck and depleting savings just to remain on the gerbil wheel.

Notwithstanding the propaganda coming from policy makers, Wall Street and the hand-puppet mainstream media, the economy is sinking.  The current spike in the stock market is nothing more than a rabid bear market rally of historic proportions. The stock market is not trading higher on fundamentals or hedge funds plowing investment capital back into the market (away from algo-based momentum trading).

According to data tracked by Goldman Sachs, hedge fund exposure to the stock market is well below levels registered during the last 18 months. As it turns out, corporate stock buybacks and short-covering are driving stocks higher. Buybacks YTD are tracking 91% higher than the same period last year. Short interest in the S&P 500 is now at the lowest level since 2007. The stocks that have performed the best since Christmas are the most heavily shorted stocks.

We’re not hearing anymore whining about the hedge fund computers dictating the direction of the market as was commonplace during the December sell-off. But when this market rolls over and rips in reverse, the Leon Cooperman’s of the world will be spilling tears all over the Wall Street Journal and CNBC complaining about hedge fund algos driving stocks lower. Funny thing, that…

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

A Financial System Headed For A Collision With Debt

The retail sales report for December – delayed because of the Government shut-down – was released this morning. It showed the largest monthly drop since September 2009. Online sales plunged 3.9%, the steepest drop since November 2008. Not surprisingly, sporting goods/hobby/musical instruments/books plunged 4.9%. This is evidence that the average household has been forced to cut back discretionary spending to pay for food, shelter and debt service (mortgage, auto, credit card, student loans).

I had to laugh when Trump’s Cocaine Cowboy – masquerading as the Administration’s flagship “economist” – attributed the plunge in retail sales to a “glitch.” Yes, the “glitch” is that 7 million people are delinquent to seriously delinquent on their auto loan payments. I’d have to hazard a wild guess that these folks aren’t are not spending money on the latest i-Phone or a pair of high-end yoga pants.

Here’s the “glitch” to which Larry must be referring:

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. The middle class spending capacity is predicated on disposable income, savings, and borrowing capacity. Disposable income is shrinking, the savings rate is near an all-time low and many households are running out of capacity to support more household debt.

I found another “glitch” in the private sector sourced data, which is infinitely more reliable than the manipulated, propaganda-laced garbage spit out by Government agencies. The Conference Board’s measurement of consumer confidence plunged to 120.2 from 126.6 in January (December’s number was revised lower). Both the current and future expectations sub-indices plunged. Bond guru, Jeff Gundlach, commented that consumer future expectations relative to current conditions is a recessionary signal and this was one of the worst readings ever in that ratio.

This was the third straight month the index has declined after hitting 137.9 (an 18-yr high) in October. The 17.7 cumulative (12.8%) decline is the worst string of losses since October 2011 (back then the Fed was just finishing QE2 and prepping for QE3). The expectation for jobs was the largest contributor to the plunge in consumer confidence. Just 14.7% of the respondents are expecting more jobs in the next 6 months vs 22.7% in November. The 2-month drop in the Conference Board’s index was the steepest 2-month drop since 1968.

This report reflects a tapped-out consumer. It’s a great leading economic indicator because historically downturns in this report either coincide with a recession or occur a few months prior.

Further supporting my “glitch” thesis, mortgage purchase applications have dropped four weeks in row after a brief increase to start 2019. Last week purchase applications tanked 6% from the previous week. The previous week dropped 5% after two consecutive weeks of 2% drops. This plunge in mortgage purchase apps occurred as the 10yr Treasury rate – the benchmark rate for mortgage rates – fell to its lowest level in a year.

Previously we have been fed the fairy tale that housing sales were tanking because mortgage rates had climbed over the past year or that inventory was too low. Well, mortgage rates just dropped considerably since November and home sales are still declining. The inventory of existing and new homes is as high as it’s been in over a year. Why? Because of the rapidity with which number of households that can afford the cost of home ownership has diminished. The glitch is the record level of consumer debt.

The parabolic rise in stock prices since Christmas is nothing more than a bear market, short-covering squeeze triggered by direct official intervention in the markets in an attempt to prevent the stock market from collapsing. This is why Powell has reversed the Fed’s monetary policy stance more quickly than cock roaches scatter when the kitchen light is turned on. But when 7 million people are delinquent on their car loan and retail sales go straight off the cliff, we’re at the point at which stopping QT re-upping QE won’t work. The stock market will soon seek lower ground to catch down to reality. This “adjustment” in the stock market could occur more abruptly most expect.

As The Fed Reflates The Stock Bubble The Economy Crumbles

I get a kick out of these billionaires and centimillionaires, like Kyle Bass yesterday, who appear on financial television to look the viewer in the eye and tell them that economy is booming.  Kyle Bass doesn’t expect a mild recession until mid-2020. Hmmm – explain that rationale to the 78%+ households who are living paycheck to paycheck, bloated with a record level of debt and barely enough savings to cover a small emergency.

After dining on a lunch fit for Elizabethan royalty with Trump, Jerome Powell decided it was a good idea to make an attempt at reflating the stock bubble. After going vertical starting December 26th, the Dow had been moving sideways since January 18th, possibly getting ready to tip over. The FOMC took care of that with its policy directive on January 30th, two hours before the stock market closed. Notwithstanding the Fed’s efforts to reflate the stock bubble – or at least an attempt to prevent the stock market from succumbing to the gravity of deteriorating fundamentals – at some point the stock market is going to head south abruptly again. That might be the move that precipitates the renewal of 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.

For me, this graphic conveys the economic reality as well as any economic report:

The chart above shows the Wall Street analyst consensus earnings growth rate for each quarter in 2019. Over the last three months, the analyst consensus EPS forecast has been reduced 8% to almost no earnings growth expected in Q1 2019. Keep in mind that analyst forecasts are based on management “guidance.” The nearest next quarter always has the sharpest pencil applied to projections because corporate CFO’s have most of the numbers that go into “guidance.” As you can see, earnings growth rate projections have deteriorated precipitously for all four quarters. The little “U” turn in Q4 is the obligatory “hockey stick” of optimism forecast.

Perhaps one of the best “grass roots” fundamental indicators is the mood of small businesses, considered the back-bone of the U.S. economy. After hitting a peak reading of 120 in 2018, the Small Business Confidence Index fell of a cliff in January to 95. The index is compiled by Vistage Worldwide, which compiles a monthly survey of 765 small businesses. Just 14% expect the economy to improve this year and 36% expect it to get worse. For the first time since the 2016 election, small businesses were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment.

The Vistage measure of small business “confidence” was reinforced by the National Federation of Independent Businesses confidence index which plunged to its lowest level since Trump elected. It seems the “hope” that was infused into the American psyche and which drove the stock market to nose-bleed valuation levels starting in November 2016 has leaked out of the bubble. The Fed will not be able to replace that hot air with money printing.

I would argue that small businesses are a reflection of the sentiment and financial condition of the average household, as these businesses are typically locally-based service and retail businesses. The sharp drop in confidence in small businesses correlates with the sharp drop in the Conference Board’s consumer confidence numbers.

The negative economic data flowing from the private sector thus reflects a much different reality than is represented by the sharp rally in the stock market since Christmas and the general level of the stock market. At some point, the stock market will “catch down” to reality. This move will likely occur just as abruptly and quickly as the rally of the last 6 weeks.

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 Housing Market Is Sliding Down The Wall It Hit In Late August

A couple of my subscribers emailed me expressing frustration over the fact that their recent homebuilder puts are either not moving higher or losing value despite the sell-off in the overall stock market. There’s two factors. First, the homebuilder sector has dropped well over 30% since late January. To an extent there may be some seller’s fatigue. At some point there will be short term rally that could generate at 15-25% bounce in the sector. I believe that rally will occur from a lower level on the DJUSHB currently, but it’s always a risk if you are short.

The second factor is the abrupt move in the 10yr Treasury yield from 3.25% down to 2.85%. This move occurred in four weeks. This is a big move in that period of time. Hedge fund algos are programmed to buy homebuilders when interest rates drop on the premise that lower rates stimulate home sales. It’s really that simplistically knee-jerk. That’s why the Dow can fall 400 points and the homebuilders remain flat or even move higher (stocks fall and the money flows into Treasuries which drives yields lower and homebuilders higher). Since the stock market began dropping in late October, the DJUSHB has moved from 595 to as high as 683 intra-day on November 28th. I’m surprised it didn’t bounce over 700. The move from 595 to a high-close of 686 on November 29th. This is nearly a 15% bounce. The DJUSHB closed at 643 this past Friday, down 5.6% from the 686 close.

But lower rates in the current context are not going to be a benefit for home sales. The mini-crash in the 10yr yield, combined with the flat yield curve, reflects a weak economy growing weaker. Potential homebuyers, in conjunction with the tightening credit market discussed above, are going to find it hard to qualify for a mortgage. Many no longer have the ability to make even a 3% down payment. Two weeks ago on Friday, when the stock market began to tank, the DJUSHB was up as much 14 points from Friday’s close. The DJUSHB closed down 8 points (1.2%) for the day. This was with the 10yr yield closing at its lowest yield since August 31st. On that day, the DJUSHB closed at 768. With the DJUSHB at 661, it’s 14% below where it was trading the last time the 10yr hit 2.85%.

Reinforcing my assertions above about the financial condition of prospective middle class homebuyers, The U of Michigan released its December consumer sentiment index on Friday. While the overall index was flat vs November, the future expectations component (the “hope” index) fell to its lowest level since December 2017. However, the homebuying conditions index fell to its lowest in 10 years. Recall that the homebuilders sentiment index for November plunged.

The graph below shows what’s going with builders in terms of actual economics. The chart plots the ratio of homebuilding permits to completions. Permits can be a fluff number because a homebuilder does not have put up much money to file a building permit. But completions reflects both demand and a homebuilder’s willingness to build spec homes (homes without buyer orders). A falling ratio indicates falling demand from buyers, rising order cancellation rates and risk aversion from homebuilders.

Another indication of the air flowing out of the housing bubble is the bidding war indicator. A subscriber sent me an article from the Seattle Times on the stunning drop in multiple bids for the same home across the country in the previously hottest bubble areas. In February 2018 in Seattle, for instance, 81.4% of listed homes had multiple bids. By November that number plunged to 21.5%, the lowest percentage of multiple bids on homes for sale in the history of the metric (Redfin began tracking this data in 2011). Other cities that made the top-10 list by Redfin include Boston, L.A., San Diego, Washington DC, Denver, Portland, Austin – all included in any list of the hottest bubble markets over the last 5 years.

The bottom line: We may have just seen the first real bear market counter-trend rally in the builders when the DJUSHB jumped 15% over three months. If the 10yr continues to drift lower, we might see one more push higher.

The above commentary is an excerpt from a recent Short Seller’s Journal.  The latest issue has a short idea related to new housing starts that has at least 50% downside.  To learn more about this newsletter, click here:   Short Seller’s Journal information

Trump’s Trade War Dilemma And Gold

If the “risk on/risk off” stock market meme was absurd, its derivative – the “trade war on/trade war off” meme – is idiotic.  Over the last several weeks, the stock market has gyrated around media sound bytes, typically dropped by Trump,  Larry Kudlow or China,  which are suggestive of the degree to which Trump and China are willing to negotiate a trade war settlement.

Please do not make the mistake of believing that the fate the of the stock market hinges on whether or not Trump and China reach some type of trade deal.  The “trade war” is a “symptom” of an insanely overvalued stock market resting on a foundation of collapsing economic and financial fundamentals.  The trade war is the stock market’s “assassination of Archduke Franz Ferdinand.”

Trump’s Dilemma – The dollar index has been rising since Trump began his war on trade. But right now it’s at the same 97 index level as when Trump was elected. Recall that Trump’s administration pushed down the dollar from 97 to 88 to stimulate exports. After Trump was elected, gold was pushed down to $1160. It then ran to as high as $1360 – a key technical breakout level – by late April. In the meantime, since Trump’s trade war began, the U.S. trade deficit has soared to a record level.

If Trump wants to “win” the trade war, he needs to push the dollar a lot lower. This in turn will send the price of gold soaring. This means that the western Central Banks/BIS will have to live with a rising price gold, something I’m not sure they’re prepared accept – especially considering the massive paper derivative short position in gold held by the large bullion banks.  This could set up an interesting behind-the-scenes clash between Trump and the western banking elitists.

I’ve labeled this, “Trump’s Dilemma.” As anyone who has ever taken a basic college level economics course knows, the Law of Economics imposes trade-offs on the decision-making process (remember the “guns and butter” example?). The dilemma here is either a rising trade deficit for the foreseeable future or a much higher price of gold. Ultimately, the U.S. debt problem will unavoidably pull the plug on the dollar.  Ray Dalio believes it’s a “within 2 years” issue. I believe it’s a “within 12 months” issue.

Irrespective of the trade war, the dollar index level, interest rates and the price of gold,  the stock market is headed much lower.   This is because, notwithstanding the incessant propaganda which purports a “booming economy,” the economy is starting to collapse. The housing stocks foreshadow this, just like they did in 2005-2006:

The symmetry in the homebuilder stocks between mid-2005 to mid-2006 and now is stunning as is the symmetry in the nature of the underlying systemic economic and financial problems percolating – only this time it’s worse…

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The commentary above is a “derivative” of the type of analysis that precedes the presentation of investment and trade ideas in the Mining Stock and Short Seller’s Journals. To find out more about these newsletters, follow these links:  Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

The Trade War Shuffle And The Fukushima Stock Market

The market is already fading quickly  from the turbo-boost it was given by the announcement that China and Trump reached a “truce” on Trump’s Trade War – whatever “truce” means.   Last week the stock market opened red or deeply red on several days, only to be saved by a combination of the repetitious good cop/bad bad cop routine between Trump and Kudlow with regard to the potential for a trade war settlement with China and what has been dubbed the introduction of the “Powell Put,” in reference to the speech on monetary policy given by Fed Chair, Jerome Powell, at the Economic Club of New York on Wednesday.

It’s become obvious to many that Trump predicates the “success” of his Presidency on the fate of the stock market. This despite the fact that he referred to the stock market as a “big fat ugly bubble” when he was campaigning.  The Dow was at 17,000 then. If it was a big fat ugly bubble back then, what is it now with the Dow at 25,700? If you ask me, it’s the stock market equivalent of Fukushima just before the nuclear facility’s melt-down.

Last week and today are a continuation of a violent short-squeeze, short-covering move as well as momentum chasing and a temporary infusion of optimism. I believe the market misinterpreted Powell’s speech. While he said the Fed would raise rates to “just below a neutral rate level,” he never specified the actual level of Fed Funds that the Fed would consider to be neutral (neither inflationary or too tight).

I believe the trade negotiations with China have an ice cube’s chance in hell of succeeding. The ability to artificially stimulate economic activity with a flood of debt has lost traction. The global economy, including and especially the U.S. economy (note: the DJ Home Construction index quickly went red after an opening gap up), is contracting. Trump and China will never reach an agreement on how to share the shrinking global economic pie.

While Trump might be able to temporarily bounce the stock market with misguided tweets reflecting trade war optimism, even he can’t successfully fight the Laws of Economics. His other war, the war on the Fed, will be his Waterloo. The Fed has no choice but to continue feigning a serious rate-hike policy. Otherwise the dollar will fall quickly and foreigners will balk at buying new Treasury issuance.

For now, Trump seems to think he can cut taxes and hike Government spending without limitation. But wait and see what happens to the long-end of the Treasury curve as it tries to absorb the next trillion in new Treasury issuance if the dollar falls off a cliff.  Currently, the U.S. Treasury is on a trajectory to issue somewhere between $1.7 trillion and $2 trillion in new bonds this year.

Despite the big move higher in the major stock indices, the underlying technicals of the stock market further deteriorated. For instance, every day last week many more stocks hit new 52-week lows than hit new 52-week highs on the NYSE. As an example, on Wednesday when the Dow jumped 618 points, there were 15 news 52-week lows vs just 1 new 52-week high. The Smart Money Flow index continues to head south, quickly.

For now it looks like the Dow is going to do another “turtle head” above its 50 dma (see the chart above) like the one in early November. The Dow was up as much as 442 points right after the open today, as amateur traders pumped up on the adrenaline of false hopes couldn’t buy stocks fast enough. As I write this, the Dow is up just 140 points. I suspect the smart money will once again come in the last hour and unload more shares onto poor day-traders doing their best impression of Oliver Twist groveling for porridge.

Guest Post: New Home Sales Collapse

Note: New homes sales, based on the seasonally adjusted annualized rate metric, are down over 23% from their peak in November 2017. Pending home sales, which translate into existing home sales less canceled contracts (typically failed financing), are down on a year-over-year basis 11 out of the last 12 months. But it’s not just interest rates, which aren’t up much from their lows in the context of the last 20 years. A bigger factor is “market mortgage fatigue.” The Govt has tapped out the pool of potential mortgagees by continuously lowering the bar for qualifying for a FNM/FRE mortgage. In addition, the Government slashed the cost of PMI insurance. That plus the tax cut have offset the cost effect of slightly higher mortgage rates (up about 1% in the last year – big deal). The remaining pool of first time buyers largely will have trouble qualifying until the Government lowers the bar again…

Aaron Layman, who is one of the few honest realtors, wrote a worthwhile commentary, posted below, on the state of the housing market. You can visit Aarons’s site here: AaronLayman.com

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The Census Bureau numbers for October new home sales posted at a seasonally adjusted annual rate (SAAR) of 544,000 units. This was way below expectations of a 575,000 print, and near a three-year low. As I have been detailing for much of the year, much of that “pent-up demand” that you hear real estate industry mouthpieces talking about is a giant work of fiction, a tired marketing ploy that the media, economists and Realtors have been using in attempt to justify grossly inflated home prices across the U.S.

Well, it appears the cat is officially out of the bag with the release of October home sales. While the previous months sales were revised higher, the miserable October print just corroborates my thesis that the Fed’s asset-bubble unwind is just getting started. There are plenty of other consequences in the pipeline. It’s important to remember that the housing market, thanks to the Federal Reserve’s failed policies, is more intricately tied to the financial markets than ever before. This was the Faustian bargain that Obama and the Fed made when they decided to bail out every Wall Street institution under the sun at the expense of American taxpayers, including the ones running obvious accounting control frauds. Of course the millions of homeowners who lost their homes to foreclosures (many of those executed in kangaroo courts with fraudulent robosigned documents) were deemed acceptable collateral damage to save the “system”.

The ultimate con was of course advertised as a salvation of the economy. In reality it just delayed the eventual reset with a new pile of debt that is larger than ever and spread among multiple asset classes rather than just housing. The big problem, one that the Fed’s economists remain willfully ignorant of, is the unfortunate reality that all of this speculative debt is more interest-rate sensitive than they would have you believe. The new home sales market is exposing this unfortunate dilemma very clearly.

According to Census numbers, new home sales in October collapsed 12 percent from the same time last year. Sales were down 8.9 percent from the revised September print. The median price of a new home contracted in October was 309,700, down $9800 or 3 percent. The average price of a new home contracted in October came in at $395,000, up $1,000 from October of last year. The supply of new homes for sale in October rose to 7.4 months, a 32 percent jump from October of last year! So if prices fell three percent and supply jumped higher, why the big collapse in sales? Can you spell “housing market bubble”. Aside from the swoon in the stock market during October, the other key ingredient for deflating an asset bubble was also present, as interest rates hit a multi-year high. We now have a good idea of what the breaking point for the housing market is, and it’s a lower threshold than many in the media were/are willing to admit. This is the result of years of rampant artificial asset price inflation courtesy of the Federal Reserve.

The swoon in new home sales is simply the reflection of moral hazard coming home to roost. While the media, the Fed and its army of economists have continued to tout the amazing bull market “recovery”, the sand (debt) upon which it was built is now shifting. That carefully crafted narrative that we have been spoon-fed for the last several years is looking more tenuous by the day.

Powell Just Signaled That The Next Crisis Is Here

Housing and auto sales appear to have hit a wall over the last 8-12 weeks.  To be sure, online holiday sales jumped significantly year over year, but brick-n-mortar sales were flat. The problem there:  e-commerce is only about 10% of total retail sales.  We won’t know until January how retail sales fared this holiday season.  I know that, away from Wall Street carnival barkers, the retail industry is braced for disappointing holiday sales this year.

A subscriber asked my opinion on how and when a stock market collapse might play out. Here’s my response: “With the degree to which Central Banks now intervene in the markets, it’s very difficult if not impossible to make timing predictions. I would argue that, on a real inflation-adjusted GDP basis, the economy never recovered from 2008. I’m not alone in that assessment. A global economic decline likely started in 2008 but has been covered up by the extreme amount of money printed and credit created.

It’s really more of a question of when will the markets reflect or catch up to the underlying real fundamentals? We’re seeing the reality reflected in the extreme divergence in wealth and income between the upper 1% and the rest. In fact, the median middle class household has gone backwards economically since 2008. That fact is reflected in the decline of real average wages and the record level of household debt taken on in order for these households to pretend like they are at least been running place.”

The steep drop in housing and auto sales are signaling that the average household is up to its eyeballs in debt. Auto and credit card delinquency rates are starting to climb rapidly. Subprime auto debt delinquencies rates now exceed the delinquency rates in 2008/2009.

The Truth is in the details – Despite the large number of jobs supposedly created in October and YTD, the wage withholding data published by the Treasury does not support the number of new jobs as claimed by the Government. YTD wage-earner tax withholding has increased only 0.1% from 2017. This number is what it is. It would be difficult to manipulate. Despite the Trump tax cut, which really provided just a marginal benefit to wage-earners and thus only a slight negative effect on wage-earner tax withholding, the 0.1% increase is well below what should have been the growth rate in wage withholding given the alleged growth in wages and jobs. Also, most of the alleged jobs created in October were the product of the highly questionable “birth/death model” used to estimate the number of businesses opened and closed during the month. The point here is that true unemployment, notwithstanding the Labor Force Participation Rate, is much higher than the Government would like us to believe.

Fed Chairman Jerome Powell signaled today that the well-telegraphed December rate hike is likely the last in this cycle of rate-hikes, though he intimates the possibility of one hike in 2019. More likely, by the time the first FOMC meeting rolls around in 2019, the economy will be in a tail-spin, with debt and derivative bombs detonating. And it’s a good bet Trump will be looking to sign an Executive Order abolishing the Fed and giving the Treasury the authority to print money. The $3.3 billion pension bailout proposal circulating Congress will morph into $30 billion and then $300 billion proposal. 2008 redux. If you’re long the stock market, enjoy this short-squeeze bounce while it lasts…

Stock, Bond, and Real Estate Bubbles Are Popping – Got Gold?

“I don’t know how this whole thing is going unwind – I just think it’s not going to be pleasant for any of us, even if you own gold and silver.  I think owning gold and silver gives you a chance to survive financially and see what it’s going to look like on the other side of what is coming…”

My good friend and colleague, Chris Marcus, invited me on to his Stockpulse podcast to discuss the financial markets, economy and precious metals.  In the course of the discussion, I offer my view of the Bank of England’s refusal to send back to Venezuela the gold the BoE is  “safekeeping” for Venezuela.

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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.