Economy Continues To Fall Apart

Forget the “seasonally adjusted,” highly massaged data released daily now by regional Fed banks, industry organizations (i.e. industry snake-oil selling entities) and  of course the Government, here’s what the CEO of NCR, the largest point-sales systems to retailers, had to say after the Company’s 3rd quarter earnings were released:

Market conditions within the retail industry worsened in the third quarter, as evidenced by weak same store sales comparisons and financial results. This resulted in our retail customers spending more cautiously than anticipated and further delaying solution rollouts…In addition to our third quarter preliminary results, we now expect our 2014 results to be below our previous guidance.

Quite the different picture of the retail environment than what you hear from Wall Street and the media cheerleaders.  Even with the massaged data, most current economic reports are falling below Wall Street’s forecasts.

The indicators I would point to which reflect the rotting core of economy are the price of oil and the 10yr Treasury yield.   The 10yr yield is falling because it’s the only “safe” place to park cash that offers some yield.  Note how the yield is dropping despite the ending of QE bond buying.   And oil is a function of supply and demand.  The price of oil similarly collapsed in 2008 just ahead of the financial and economic collapse that occurred that year.  A collapse that was diverted by the onset of an eventual $4 trillion in QE stimulus and taxpayer-funded Government spending.

The truth is, real inflation has infected everything households need to buy and deflation will soon hit every asset sector that has been pumped up to the sky again by Fed stimulus (click to enlarge):


Note that “Avg Hourly Wages” is nominal.  If you inflation-adjust it, average hourly wages are declining.

Asset deflation will hit the stock market and housing market quite hard.  The Fed can keep the stock market pumped up – for now.   But both the Fed and Government have used up their bag of tricks to stimulate homebuying.   Even the biggest cheerleader of all time, CNBC, seems to understand this dymamic:   LINK.

Speaking of housing, several people have asked me privately for my view on the proposed changes regulations governing Fannie Mae and Freddie Mac.   Here’s what I think:

Here’s what I think about the proposed changes with FNM/FRE:

1)  Mel Watt – Obama’s “Housing Czar” is a bag-man for the Wall Street players who loaded up on buy to rent portfolios. They pad his personal slush fund. Most of these funds expected to be able to buy up distressed homes, rent them out and collect a 6% avg yield on the portfolio and sell the homes into the next “recovery.” They are the ones who fueled the recovery – they were the primary bid in the market. They are no longer even bidding and I think many are disappointed with the “yield” on their investment. This is why we’re not seeing REIT-like IPOs of the portfolios. Colony Capital tried to take its portfolio public last summer (2013) and the market wouldn’t take it. I think these funds are looking for new “bidders” to bag and that’s why Watt is trying seduce bad credit, low income people into the market.

2)  It’s irrelevant that FNM/FRE will take their down payment requirement down to 3%. FHA has been offering 3.5% down payment mortgages since 2008. In fact, FHA went from 2% of the market in 2007 to its current 20%. FHA is now seeing their 2008 vintage mortgages experience a 30% delinquency rate, 2009/2010 over 20%. I have not seen the figures recently for the later vintages. My point here is that, there has already been loose credit available for buyers with bad credit and I don’t think the addition of FNM/FRE offering 3% low credit score mortgages is going to expand the market by much, if at all. Hell FHA even lets buyers use a gifted down payment. So buyers have been able to buy homes with no real hard equity for quite some time.

3)  I think one of the key facets of the proposed change has to do with the liability the underwriting bank faces – i.e. the reps and warranties – on the garbage the banks dump into FNM/FRE. The theory is that banks aren’t funding mortgages because they don’t want to have bad mortgages put back to them by FNM/FRE. Again, I’m not sure this is really going to stimulate demand. To the extent it does, it now puts the taxpayer at much greater risk of bailing out the bad mortgages – again.   The truth is, banks are not funding mortgages because the demand is not there.  In its latest quarter Well Fargo, by far the country’s largest mortgage originator disclosed that its mortgage applications pipeline fell to its lowest since the 2008 financial collapse:  LINK.   That is not because low down payment, low credit mortgages are not available because they are and have been all along.

4) We’ve had very low interest rates now since early 2013 and home sales unit volume is declining, especially after you strip away as much as is possible the “seasonal adjustments” and bogus annualization of the monthly numbers. Existing home sales have declined year over year for 11 months in a row.

My view is thus that the proposed changes that Watt is going to implement really won’t stimulate sales much, if at all. The middle/lower middle class is just not earning enough monthly income after necessity expenses to fund the all-in monthly cost of home ownership. I think the ones that can afford the monthly expense have bought homes with FHA paper over the last 4 years. The “tight credit” narrative was not valid any more than the “low inventory” or Polar Vortex” excuses last winter.

The Fed can’t keep the stock market propped up forever unless it prints more money.   Housing is going to crash under either scenario.   The homebuilders are a great short-sell play here.  If you own them, get out.

25 thoughts on “Economy Continues To Fall Apart

  1. Dave Kranzler, you are an asinine motherfucker. Housing stocks will surge until you go bankrupt and commit suicide. Stop the fear mongering, moron!

    1. It’s really easy to send abusive and juvenile comments anonymously to bloggers, isn’t it. I can tell you are very articulate – like maybe a 150 on your verbal S.A.T. test? 75 just for spelling your name correctly!

      1. it appears you have struck the nerves of a FoolAide drinker dave…
        you can always easily identify those who deep down are insecure about the position they have taken…
        dont trip dave…ignore

        1. LOL – no doubt. That’s actually like the 5th comment he tried to lob in. I nuked the first 4 because they were largely caveman grunts wrttien in illegible sanskrit.

          1. As Willie the Shake once pronounced “the lady doth protest too much, me thinks”. Yes Dave not everyone can handle the truth. The truth will set you free. Most people in today’s world don’t want the truth it upsets the utopian promise of unicorns and rainbows.

  2. Every once in a while I make myself watch a little bit of CNBC just to see what they’re saying. I live in central Massachusetts where we have the education bubble and the medical/big pharma bubble helping us out and the economy still sucks. Almost everyone I know and nearly everyone I encounter lives with some degree of tension, of fear in the back of their mind of things falling apart. Very few have it crystallized into thoughts such as you see in the alternative media but it’s there in some ambiguous or embryonic way.

    But on CNBC, it’s happy talk completely inconsistent happy talk, but happy talk with certitude. I witnessed Dennis Gartman pronouncing with absolute certainty that the price of oil was going to $40 per barrel or lower and this had no negative implications for the economy. It wasn’t as a result of crashing demand. It just . . is. And no one in the studio could bother to ask him how he’s so absolutely sure of this monumental economic development today when he was saying nothing of it before this.

    If I watched that stuff all the time (and believed it)I’d question my sanity. Thanks for not being part of the captive facade, Dave.

    1. Futures markets keep precious metals prices depressed

      How the futures markets conspire to keep commodity prices down with paper and keep the rich nations supplied at the expense of the poorer ones.

      Taking this scenario further, Murrell comments that it is in the interest of the Western consuming nations to set these commodity prices as low as possible and, by virtue of their usage of the futures markets, to do this they are in effect corrupting market supply/demand and pricing basics. They can thus acquire the supplies they need, while setting a price that suits them through the futures markets and print out of thin air all the currency needed to pay for them.

      Meanwhile, the actual producing countries are thus forced to accept prices for their products that may even be below the cost of production due to the ‘market price’ set by the futures markets and then in exchange just receive potentially worthless paper which they will warehouse as currency reserves.

      Murrell takes the overall West-favouring scenario a step further by pointing out that these currency reserves are necessary for these countries to protect their own currencies in the light of ever continuing attacks on product pricing via the same futures markets. This does not only keep commodity prices low for the consuming nations, but also reduces developing world tax revenues thus perpetuating poverty in those countries.

      Now maybe some of this is a little over the top, but there has to be a strong element of truth in the impact of the futures markets on commodity pricing – whether this is one of the less-appetising facets of the capitalist system as practiced by the bankers and financial institutions, or whether this is an ongoing result of great game politics whereby the strong continue to dominate the weak, is perhaps rather more open to question.

      who sponsors Dennis?

  3. Great commentary Dave. Don’t know if you saw this a couple weeks ago. The vampire headed by the money elites and their lackeys always want more blood. Always there to lie and commit fraud on the way up and profit on the way down. We live in a cutthroat con game of a system that is looking to hook even more dupes with the new changes if you ask me.

    “By now, banks have usually sold the houses. But the proceeds of those sales were often not enough to cover the amount of the loan, plus penalties, legal bills and fees. The two big government-controlled housing finance companies, Fannie Mae and Freddie Mac, as well as other mortgage players, are increasingly pressing borrowers to pay whatever they still owe on mortgages they defaulted on years ago.”

  4. No wonder Fannie Mae and Freddie Mac have been buying up all the distressed loans from the banks – looks like they are going to make people gov’t sponsored debt slaves.

  5. Dave, you HAVE to watch M2 when it comes to projecting asset prices, not just what the Fed is currently doing. What the Fed is currently doing is irrelevant in the short term.

      1. Fair enough. As long as you realize the Fed has already printed enough new money already to increase the money supply by multiples of its current stock.


        1. Federal Reserve Credit – i.e. its balance sheet – has inflated 460% in 12 years, most of it in the last 6. This does not take into account the amount by which Treasury Debt has inflated, over and above the amount purchased by the Fed. This is significant because debt – until repaid – assumes the characteristics of money. In other words, the true money supply needs to include issued and outstanding Treasury debt. So in essence, the true money supply has increase by even more than would be measured by M2 or M3.

          1. Yes. Base money supply. It’s not the real money supply. We don’t know the real money supply. We can’t possibly know the real money supply. The Fed does not disclose that number.

  6. Look to history for the answer.

    Currency printing, or inflating the supply of currency, does not add value to said currency. Far from it. It has the opposite effect. Throughout history, going as far back as the Byzantine Empire, once you begin to cheapen (inflate, print) the currency, it does NOT stop.

    Not once throughout all that timeline has an entity that went down this path stopped doing it. ALWAYS resulting in the failure of the currency involved. To expect the Fed to stop “printing” (adding digits) and to alter financial course 180 degrees, is to still believe in the tooth fairy! Ludwid von Mises said it years ago;

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

    So, all this ‘gum flapping’ of the Fed stopping their printing and reversing their financial course, is just so much hot air, without substance. Just like the dollar!

    1. So what to make of this latest ramp…

      1) pre-FOMC & election MOPE?
      2) final squeeze of shorts who positioned for “end” of QE? (then temporary crash and QE4 to beyond)
      3) early stages of US version of Zimbabwe hyperinflation market?

      looks like a few of the homebuilders are headed up to their 200 MA

      1. It’s all low-volume, computer-driven momentum chasing. The homebuilders’ beta vs. the SPX is probably 2, meaning the builders move 2% for every 1% move in the SPX. You need to measure that over several days, not just one. If you look at the tail-off in volume across the entire market, you can see this move is running out of steam.

      2. The markets are holding their breath here, waiting for the FOMC tomorrow.

        Problem is, the Fed has only one card left to play in their hand. Print.

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