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.