Month: August 2014

The Housing Echo-Bubble Is Popping

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

There is nothing remotely "normal" about the echo-bubble's rise, and we can anticipate that its deflation will be equally abnormal.
 

Conventional wisdom on the resurgence of the housing markets takes one of two paths:
 
1. Housing is not in a bubble, it is merely returning to "normal"
 

2. Housing is bubbly in some markets, but prices will continue to rise

 

Here's an alternative view: housing is in an echo-bubble that's popping. Courtesy of the excellent Market Daily Briefing, here are some charts that make the case that the housing echo-bubble was just another Federal Reserve-induced speculative asset bubble that's popping, like every other speculative bubble in recorded history.
 
First up: home prices, as measured by the Case-Shiller Price Index. Note the near-perfect symmetry of the echo-bubble: it has taken roughly the same time-span to inflate and reach a top as the first housing bubble from January 2004 to its peak 2+ years later.
 
The echo-bubble has topped out at about 50% of the decline from the primary bubble top to the trough in 2012.
 
The distorted fundamentals of the echo-bubble are revealed in this chart of mortgage debt to wages. Current levels of mortgage debt are double historic levels, and 35% above the level of 2001, when the primary housing bubble lifted off.
 
The third charts tells us the echo-bubble is popping. Note that housing sales lead price by about six months: sales started falling in late 2005, and prices rolled over in mid-2006.
 
Housing sales rolled over in December 2013, and sure enough, prices are starting to weaken in many markets.
The echo-bubble doesn't pass the sniff test as a "normal" housing recovery. Exhibit #1: who's buying and who's not buying:
 
1. Marginal buyers using 3% down-payment FHA/VA loans who wouldn't qualify for conventional mortgages. The risk of marginal borrowers defaulting is high, a reality reflected in FHA's default rate:
 
When lending sources dried up during the financial crisis, the FHA propped up the housing market by insuring the lenders it works with against losses and enticing them back into the market. But the FHA’s default rate shot up as its loan volume expanded, depleting its cash reserves to levels below what is required by law. In September 2013, the FHA tapped taxpayer money to cover its losses for the first time in the agency’s 80-year history.
 
2. Who's not buying: Upper-Income, Educated, Married with Children, and Still Not Buying:Declining Homeownership among "Prime" First-Time Home Buying Candidates (Fannie Mae Housing Insights, Volume 4, Issue 4)
 
3. The dominance of all-cash buyers–generally investors (those close to the money spigots of the Fed's free money for financiers) and foreign buyers.
 
Note the difference between mortgage credit expansion, which has lagged price gains. This suggests many of the sales (about 35% in many hot markets) were all-cash purchases that did not require a mortgage
Take away the Fed's zero-interest rate policy (ZIRP), its free money for financiersand foreign buyers seeking a safe haven for their hot money, and what's left of the supposedly "normal" housing recovery? Not much.
There is nothing remotely "normal" about the echo-bubble's rise, and we can anticipate that its deflation will be equally abnormal.
 

How do we know when an asset class is in a bubble? When everyone who stands to benefit from the continuation of the expansion declares it can't be a bubble.




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It’s Just Like 2008 All Over Again: *Hillary Can’t Lose!* or, the Dems’ Millennial Problem

Sure,
projecting a winner in a presidential election a couple of years in
advance is a mug’s game. But don’t you know that Hillary Clinton
has already won the 2016 contest? It’s just like 2008 all over
again: Hillary can’t lose.

Seriously, though, it’s obvious Hillary will win, especially
when you look at the way she’s currently trouncing leading
Republicans such as Chris Christie and Rand Paul among young
voters. The kids love Hillary, goes this line of thinking, and
since they decided the
2012 election and will only ever vote Democratic, all we
need to do now is reanimate Aretha
Franklin, the Eagles, or one of her other mummified favorite
performers for the inauguration.

But such triumphalism about Clinton and the Democratic
stranglehold on younger voters is premature, to say the least.
While there’s no question that the GOP has managed to alienate
millennials, there’s every reason to believe that top Democrats are
doing just about everything they can to squander their currently
commanding advantage.

That’s
the start of my new
Daily Beast column, which explains why Dems and their
lapdogs in the press are seriously overestimating their
stranglehold on the youth vote. As the recent
Reason-Rupe poll of millennials showed, millennials are less
partisan than older voters and despite huge (and declining) support
for Barack Obama at the polls, the kids are getting tired of both
parties. They absolutely hate the GOP in its current incarnation,
but they are also souring on Team Blue as well. Fully 34 percent of
18-29 year-old voters call themselves true independents, meaning
they don’t lean toward Republicans or Democrats. That compares to
just 11 percent on non-leaning independents among voters 30 years
old and up. 

The great political achievement of the 21st century so far has
been to alienate young voters from the two major parties in the
U.S. And the great task for both Democrats and Republicans in 2016
will be to figure out how to woo them back.


Read the whole thing.

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GDP ‘Good News’ Sparks Bond Buying & Stock Selling, Treasury Curve Crumbles Further

US GDP beat expectations ‘proving’ that government data shows the recovery meme is on track (as long as it doesn’t snow ever again). The market’s reaction… intriguing – stocks shrugged even as a USDJPY pump tried to get things going; gold and silver moved modestly higher; and Treasury yields… fell notably at the long end. 30Y is now trading with a 3.06% handle and 5s30s is back below 145bps…!

Bonds are rallying on the GDP beat…

 

The yield curve continues to collapse…

 

And stocks are shrugging..

 

Chjarts: Bloomberg




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Q2 GDP Revision Unexpected Rises On Alleged Jump In Capex To Highest Since 2011

Following the unexpected surge in Q2 GDP, which beat most analyst estimates, there was widespread expectation that based on real-time data, the revised Q2 print would be worse. So perhaps it is appropriate that the Bureau of Economic Analysis punked everyone once again, when moments ago it released the first revision to the Q2 GDP print, which instead of dropping to the consensus expected 3.9%, it instead rose to 4.2%, up from the 4.0% initial report.

This was driven not by a change in actual spending, the most important driver of the US economy, which was unchanged from the first estimate at 1.69%, but, amusingly enough, by a jump in fixed investment, i.e., CapEx, which rose from 0.3% in Q1 to 0.91% in the first Q2 GDP estimate to 1.25% currently: this is the highest CapEx print since Q4 2011. How is this possible (especially when one excludes Boeing orders)? Nobody knows, unless the BEA now adds stock buybacks to its definition of fixed investment, which as everyone now knows, is where the bulk of corporate free cash flow has been going.

As for inventory, it rose at a slightly lower pace, up 1.39% vs the 1.66% annualized pace reported previously, although on an absolute basis the number was again higher,  and as JPM reports, inventories rose by 84 billion versus the $67 billion JPM had expected, “potentially dragging on Q3.“

Finally, the other two components, Net Trade, were largely unchanged at -0.45%, and 0.27% respectively.

All in all this simply means that either the final Q2 GDP revision will be where all the dirt is stuffed in one month, or Q3 GDP will be a reversion to a much lower mean.




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Initial Jobless Claims Drop Back Under 300k, Continuing Claims Rise

“Slack” or “no slack” – initial claims tumbling along the bottom of the lowest levels in a decade suggest the US economy’s job creation is as good as it gets. Initial claims was stable at 298k (vs expectations of 300k) down very small from the 299k adjusted data for last week. Continuing claims rose 25k on the week and missed expectations but also continues to tread water at the lowest levels since 2007.

 

 

Finally – some may remember this chart as the best indicator of why stocks should keep rallying… still feel that way?

 

Now where have we seen this before?

 

Chart: Bloomberg




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Brickbat: This Will Make You Sick to Your Stomach

Des Moines
pharmacist Mark Graziano is already facing federal charges of
illegally dispensing painkillers. Now, he’s facing state charges of
illegally possessing prescription drugs. Prescription Pepcid,
in fact. A police officer pulled him over for not wearing a seat
belt and for not having a current registration sticker on his tag.
When the officer searched Graziano’s truck, he found an old bottle
of antacid under the seat.

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Ukraine Prepares to Fight Back, Americans Doubt Economic Recovery, Lennon’s Killer Says He’s Sorry: A.M. Links

  • Ukraine is preparing
    to defend itself against Russian forces     in its eastern
    regions. “The invasion by Putin of the regular Russian army is
    a fait accompli,” said Anton Herashchenko, an adviser to the
    Ukrainian Interior Minister, on his Facebook page Thursday, while
    Ukrainian President Petro Poroshenko canceled a visit to Turkey to
    focus on Ukraine’s military response. 
  • Even as
    economic recovery moseys forth    , most Americans—71
    percent—now
    say the Great Recession     “exerted a permanent drag on the
    economy.” In November 2009, only 49 percent said the same.
  • Gun tourism is a thing, and
    an increasingly popular one    .
  • What happens when one half of a California mall
    has an $8 minimum wage     and the other half must pay $10 per
    hour?
  • Ferguson and other St. Louis-area police
    departments face
    steep overtime costs     for all that time cops spent out
    pepper-spraying people and playing conquering army. 
  • Let’s talk about Gen X for a change! Overall the generation
    is in
    more debt     than either millennials or boomers; the single most
    indebted cohort are 44 year olds, who owe on average
    $142,077. 
  • John
    Lennon’s killer says     he’s “sorry for being such an
    idiot.” 

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NATO Says Over 1000 Russian Troops In Ukraine, “Extremely Worrying… Dire Situation”

Hot on the heels of Ukraine’s claims of ‘invasion’ and retraction of said claim, NATO is once again stepping in with strong claims about Russian ‘incursions’:

  • *NATO OFFICER: ESTIMATED 20,000 RUSSIAN TROOPS NEAR UKRAINE (not 17 or 45?)
  • *NATO OFFICER: OVER 1,000 RUSSIAN TROOPS OPERATING IN UKRAINE
  • *NATO OFFICER: 2ND FRONT RISKS CUTTING UKRAINE ARMY SUPPLY LINES
  • *NATO OFFICER: NEW 2ND FRONT ‘EXTREMELY WORRYING’ FOR UKRAINE

While NATO statements in the past have caused dramatic weakness in stocks (or been entirely shurgged off), it appears this time markets are taking their concerns more seriously as the officer states Ukraine’s forces are in a “dire situation.”

As Bloomberg reports,

NATO estimates there are currently 20,000 Russian troops in the border region to Ukraine, says a North Atlantic Treaty Organization military officer speaking to reporters today on condition of anonymity at supreme headquarters in Mons, Belgium. 

 

Well over 1,000 Russian troops now operating inside Ukraine: officer

 

Russian troops in Ukraine operating advanced equipment, serving as advisers for separatists: officer

 

As a result of Ukraine becoming more effective militarily starting in July, there has been a real upsurge in Russian activities of late. Cross border support, firing of rockets and artillery shells across border, supply of more weapons: officer

 

Russia has effectively created second front in the south, this is an extremely effective way to take pressure off separatists: officer

 

Puts Ukraine forces in “dire situation” since from south Russian forces can move up to link with Donetsk forces or can even move west toward Crimea: officer

 

Opening of second front in south is “extremely worrying”for Ukraine’s position; there’s a risk that Ukraine military’s supply lies will be cut: officer

 

Officer declines to call Russian moves in Ukraine an “invasion,” instead repeatedly uses the term “incursion”

Further,

  • *NATO OFFICER: RUSSIA SEEKS TO TAKE PRESSURE OFF REBEL FORCES
  • *NATO OFFICER: RUSSIAN TROOPS IN UKRAINE MANNING ADVANCED ARMS

Russia is more openly backing the Ukrainian rebels, now with small Russian military formations moving into Ukraine’s territory, senior NATO diplomat says.

 

Russia has provided artillery and rocket support for rebels, from positions both in Russia and inside Ukraine, diplomat says

 

SA-22 surface-to-air missiles are now being deployed, more sophisticated than the SA-11 missiles that downed the Malaysian airliner, diplomat says

 

Russian support has become more overt in the wake of Kiev government’s successes against the rebels near Luhansk and Donetsk, diplomat says

  • *NATO OFFICER: RUSSIAN TROOPS IN UKRAINE SERVING AS ADVISERS (just like the humanitarian Americans in Iraq?)

This follows talk earlier in the week of more advanced surface-to-air missiles.

*  *  *

It appears the ‘talk’ is a little more real this morning as Ukraine’s security council is considering calling a State of Emergency (which seems ironic given the constant threats they have been noting for months)

*  *  *

And then there’s this…

“Russian invasion” should be considered by UN Security Council, Latvian Foreign Minister




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