Month: August 2016

If St. Louis Fed’s James Bullard is the Fed’s hawk who infamously flipped to uberdove several months ago, than Boston Fed’s Eric Rosengren has become his mirror image: a former dove who has become increasingly hawkish, and who is warning that keeping rates low for long is “not without risks.” Yet, in a speech overnight at the Shanghai Advanced Institute of Finance, Beijing, China titled “Observations on Financial Stability Concerns for Monetary Policymakers“, Rosengren voiced the same concerns about a building asset bubble as Bullard did last Friday just before Yellen’s speech, when he said that “I think we are on the high side of fairly valued, I could see the process getting away from us, maybe tech stocks, maybe others.”

Rosengren started off cautiously with a warning that Fed’s mandated goals – stable prices and maximum sustainable employment – are likely to be achieved relatively soon, and “keeping interest rates low for a long time is not without risks.” As a result, important questions confront monetary policymakers in the United States, including when and how quickly to continue normalizing interest rates.

He then took his warnings up a notch, warning that central banks must think about attaining their mandates “not only at the current time, but also through time”, weighing the benefits of low interest rates now against the potential costs in the future of possibly spurring instability.

However, unlike Bullard who focused on tech stocks as indicative of bubbly forthiness, Rosengren noted that in the United States, a potential side effect of very low interest rates has been rapid price appreciation in the commercial real estate sector, adding that if the U.S. economy were to weaken, and underlying occupancy rates and rents became less favorable, a large decline in commercial real estate collateral values could lead to losses for banks. This scenario, while not his prediction, would have downstream effects on credit availability to firms and households.

Rosengren warned that “investors may be engaged in
excessive risk-taking” in the commercial property sector, which if coupled with an economic shock would set
off events that threaten financial stability.

He toned his earning back modestly saying that “in my view, commercial real estate is, by itself, unlikely to trigger financial stability problems.However, he admitted that “should prevailing economic conditions change in response to a large negative economic shock, commercial real estate prices could decline relatively quickly, leading to large losses at leveraged firms.”

Firms and households faced with long periods of low returns may react by “reaching for yield” – buying riskier assets than one would otherwise in order to archive a desired profit or savings goal, Rosengren said. “Should a large negative shock occur, firms and households would be exposed to greater losses through their holdings of riskier assets than they would be if they were not reaching for yield.”

Rosengren said that because commercial real estate debt is widely held by depository institutions, commercial real estate losses could erode banks’ capital ratios and lead to a contraction of credit availability for firms and households – similar to the credit crunch experience in the early 1990s.

As a result, revaluation of commercial real estate during a downturn could make a recession worse than if Fed had raised rates more rapidly. “Somewhat faster move to rate normalization” may delay how quickly Fed reaches dual mandate, yet it could also reduce risk of a “larger divergence” from mandate in next downturn

“The financial stability concerns that could arise from a low interest rate policy continuing for an extended period of time should be considered in conjunction with how best to achieve” the central bank’s full employment and price stability goals, “now and over time,” Rosengren concluded.

Putting all of the above in one simple chart, here is what keeps Rosengren up at night:

Just like Bullard’s warning, we expect Rosengren’s cautious forecast about a worst case scenario to be promptly ignored by Janet Yellen.

* * *

His entire presentation is below

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Thanks to a series of negative revisions, pending home sales have now tumbled YoY for two consecutive months (dropping 2.2% in July versus an expectation of a 2.2% rise). The revisions enabled the MoM print of +1.3% to beat expectations optically (thanks to a surge in The West sales +7.3%). The good news for affordability is that NAR's Larry Yun notes homebuilders focusing down-market; the bad news, obviously, is that more supply will disable the low-inventory bid holding prices up at record highs. Probably time to hike rates…

Revisions pushed the series lower, making this the 2nd monthly decline YoY in a row…

 

Thanks to revisions, the MoM gain of 1.3% headline beat expectations, thanks in large part to The West

• Northeast up 0.8%; June rose 3.2%
• Midwest fell 2.9%; June rose 0.9%
• South up 0.8%; June fell 2.9%
• West up 7.3%; June fell 1.3%

Of course the lagged movement in mortgage rates is still a positive… (until The Fed hikes?)

 

And while mortgage apps rose last week (despite a modest rise in rates), the improvement is slowing.

 

Lawrence Yun, NAR chief economist, says a sizable jump in the West lifted pending home sales higher in July.

“Amidst tight inventory conditions that have lingered the entire summer, contract activity last month was able to pick up at least modestly in a majority of areas,” he said. “More home shoppers having success is good news for the housing market heading into the fall, but buyers still have few choices and little time before deciding to make an offer on a home available for sale. There’s little doubt there’d be more sales activity right now if there were more affordable listings on the market.”

 

Adds Yun, “The index in the West last month was the highest in over three years 1 largely because of stronger labor market conditions. If homebuilding increases in the region to tame price growth and alleviate the ongoing affordability concerns, the healthy rate of job gains should support more sales.”

Recent residential construction data shows that the size and costs of new homes has moved downward over the past year. According to Yun, this is an early indication that homebuilders are beginning to shift away from building larger, more expensive homes for the upper end of the market to focusing more on properties geared for buyers in the middle and lower price tiers.

“The homeownership rate won’t move up from its over 50-year low 2 without a meaningful boost from first-time buyers, whose participation has yet to noticeably increase so far this year despite mortgage rates near all-time lows .”

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The current gold bull market is just over 6 months old, and while it has not been a gentle ride, it is very much expected considering the volatility of previous bull markets. That being said, we are just getting started. Using a sports analogy, according to our estimates we are not even halfway through the second inning using the average duration of the previous three bull markets.

Here is what the current gold bull market could look like if we used previous gains as a proxy:

Historically, the longer the preceding bear market, the longer the bull market that followed. When the bear market ended in December 2015, it marked the end to the longest gold bear market in centuries. We predict the current market will match the 2001-2008 bull and then some, and gold will break $5,000 an ounce when it’s all said and done.

On a sidenote, we are now into the fifth week of our silver giveaway. Sign up a free report on silver investing and a chance to win actual silver!

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After bouncing miraculously in June (to 18mo highs), slipped lower in July and has now tumbled in August to 51.5 (missing expectations of 54.09 markedly).With weakness across the board – new orders, inventories, and production all slumping – MNI warns, "Economic activity slowed down into the summer, suggesting June's momentum was only a temporary revival in activity. Overall, it wasn't a rosy month."
 

The June jump has been erased…

 

Chicago PMI was weak across the board…

• Prices Paid fell compared to last month
• New Orders fell compared to last month
• Employment rose compared to last month
• Inventory fell compared to last month
• Supplier Deliveries fell compared to last month
• Production fell compared to last month
• Order Backlogs fell compared to last month
• Business activity has been positive for 7 months over the past year.

The MNI Chicago Business Barometer fell 4.3 points to 51.5 in August from 55.8 in July, led by a large setback in Order Backlogs and a deceleration in New Orders.

 Four of the five Barometer components fell between July and August. Only Employment increased, hitting a 16-month high. The latest fall left the Barometer, New Orders and Production running at the slowest pace since May, when they all slipped below 50.

 

Order Backlogs fell 14.5 points to 41.7, moving back into contraction territory as they hit the lowest level since April 2016. Backlogs were above 50 for only two months (June and July) following a 16-month run of sub-50 readings. New Orders and Production also subtracted from the Barometer in August. Although both remained in expansion, they were much softer than at the end of Q2.

 

Supplier Deliveries were little changed on the month while the three buying policy measures shortened, a positive for businesses but another indication of weaker overall activity.

 

Building on July's strong pickup, Employment posted its highest reading since April 2015. Adding to this, August's special question showed a few Chicago panellists were slightly less pessimistic than a year ago about hiring over the next three months. Although most reported they were not planning to hire in three months' time, this percentage fell to 58% in August 2016 from 63% in August 2015. Also, those who said they plan to add both temporary and permanent employees rose to 21% from 15% a year ago.

 

Fewer firms expanded their inventory levels, with the indicator falling just below 50, having increased to the highest since October 2015 in the previous month.

It appears the dead-cat-bounce is over.

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In a rare statement on Tuesday, the Islamic State announced that Mohammad al-Adnani, one of its most prominent and longest-serving leaders as well as the unofficial spokesman of ISIS, was killed depriving the militant group of the man in charge of directing attacks overseas. His death marks the highest-profile killing yet of an ISIS member. A key deputy to ISIS leader Abu Bakr al-Baghdadi, he was floated to be his successor should anything happen to Baghdadi, and was seen by many as the Islamic State’s second in command.

In a report last December, NBC classified Adnani as America’s most wanted terrorist, and the number one name on the government’s kill list of ISIS leaders, say senior U.S. military and intelligence officials.

Abu Bakr Al-Baghdadi may be the face of ISIS, but Abu Muhammad al-Adnani, the terror group’s director of external operations, is the man most likely to cause harm in the West. The U.S. wants al-Adnani dead because he’s considered the author of the strategy of wanton murder that has left more than 500 dead in attacks around the world since October 10 — and apparently helped inspire last week’s massacre in San Bernardino.

A statement from ISIS’ Amaq news agency on Tuesday said Adnani died while inspecting military operations in the area of Aleppo. ISIS has not revealed his cause of death and said it “determined to seek revenge” for the killing. “After a journey filled with sacrifice and fight against non-believers, the Syrian Gallant knight, Abu Mohammed al-Adnani, joined the convoy of martyr leaders,” ISIS said.

“To the filthy and coward nonbelievers and to the holders of the Christ emblem, we bring the good news, which will keep them awake, that a new generation in the Islamic State … that loves death more than life … this generation will only grow steadfast on the path to Jihad, stay determined to seek revenge and be violent toward them.”

Adnani was one of the last living senior members, along with self-appointed caliph Abu Bakr al-Baghdadi, who founded the group and stunned the Middle East by seizing huge tracts of Iraq and Syria in 2014. As Islamic State’s spokesman, Adnani was its most visible member. As head of external operations, he was in charge of attacks overseas, including Europe, that have become an increasingly important tactic for the group as its core Iraqi and Syrian territory has been eroded by military losses.

The US State Department officially labeled Adnani a terrorist in August 2014 and put a $5 million bounty on his head. It described him as “the official spokesman for and a senior leader” of ISIS, a position he obtained after becoming one of the first foreign fighters to oppose U.S.-led forces in Iraq.

He was arrested in May 2005 in Anbar province and is believed to have spent some time between 2005 and 2010 at the US detention facility Camp Bucca. After his arrival in Syria, he was appointed deputy of Abu Mohammed al-Jawlani, leader of the Islamic State of Iraq for the northern province, then as the security leader before assuming a key role in external operations for ISIS, according to the UN Security Council.

The Islamic State reacted by saying his death would not harm it, and his killers would face “torment”, a statement in the group’s al-Naba newspaper said, according to the Site Intelligence monitoring group.

“Today, they rejoice for the killing … and then they will cry much when Allah will overpower them, with His permission, with affliction of the worst torment by the soldiers of Abu Muhammad and his brothers,” the statement said.

* * *

But while the death was welcome news, in the latest farcical development shortly after the news, both the US and Russia began a sparring match over who was responsible for Adnani’s death.

A U.S. defense official told Reuters the United States targeted Abu Muhammad al-Adnani in a Tuesday strike on a vehicle traveling in the Syrian town of al-Bab. The official stopped short of confirming Adnani’s death. As CNN adds, US-led coalition forces have not confirmed his death, but the Pentagon acknowledged he was targeted in a precision strike Tuesday near Al-Bab, Syria.

Meanwhile, Russia likewise wasted no time and Russia’s Ministry of Defense said on its official Facebook page that a Russian airstrike was responsible for the death of al-Adnani. Adnani was one of up to 40 ISIS militants killed by a Russian bomber in Aleppo province, the ministry said cited by CNN.

While there may be some minor diplomatic fallout over this latest snafu, the good news is that no matter who is responsible, one of the most prominent ISIS members has been eliminated.

“We are still assessing the results of the strike, but al-Adnani’s removal from the battlefield would mark another significant blow to ISIS,” Pentagon press secretary Peter Cook said in a statement.

“Al-Adnani has served as principal architect of ISIS’ external operations and as ISIS’ chief spokesman. He has coordinated the movement of ISIS fighters, directly encouraged lone-wolf attacks on civilians and members of the military and actively recruited new ISIS members. The U.S. military will continue to prioritize and relentlessly target ISIS leaders and external plotters in order to defend our homeland, our allies and our partners, while we continue to gather momentum in destroying ISIL’s parent tumor in Iraq and Syria and combat its metastases around the world.”

As spokesman, Adnani was the group’s most prominent face, the first to announce the ISIS caliphate even before Baghdadi did. But he was much more than a spokesman, CNN terrorism analyst Paul Cruickshank said. Adnani was well-known for ordering operatives to attack countries participating in the coalition against ISIS. Western intelligence believes he had command responsibility for the November 2015 Paris attacks.

He is believed to have carried out those orders as one of the ISIS leaders overseeing its security service, known as Amniyat, which includes the external operations unit tasked with international attacks on the West. As such, the external operations unit reported up to Adnani. A number of ISIS followers and members captured and questioned in the last two years, including French jihadists Faiz Bouchrane and Reda Hame, have attested to Adnani as head of the Amniyat.

“In some ways he’s a more dangerous figure than Abu Bakr al-Baghdadi, because he’s believed to be overseeing the external operations division of ISIS, and that’s the part of ISIS which threatens the West, which carried out the attacks in Paris, which could one day carry out an attack in the US on a significant scale,” Cruickshank said.

According to CNN’s Nic Robertson, Adnani “was the mouthpiece of ISIS. He said things like, ‘If you can’t shoot them, then stab them, and if you can’t stab them, then crush their heads with rocks. If you can’t do that then drive your cars, your vehicles, to kill them.” He absolutely tried to maximize every opportunity to instill fear in Syria and Iraq and the international community and send fighters overseas to attack.”

Adnani said ISIS supporters in the West had a religious duty to launch lone-wolf attacks, a move analysts call a game changer that may have inspired attacks in North America, Europe and Australia. “He was the strategic leader of the organization, especially when it comes to attacks on the West,” said journalist Graeme Wood, Edward R. Murrow Press Fellow at the Council on Foreign Relations. “To have that voice destroyed is a serious blow to the organization, probably the most significant kill that the enemies of the Islamic State have perpetrated since its declaration of the caliphate.”

Some strategists have suggested that the the Islamic State’s immediate response would be to organize even more deadly terrorist attacks abroad not only as retaliation but to demonstrate to the world that the void left by Adnani’s death has been filled.

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Presented with little comment…

Treasury Secretary just uttered this…

• *LEW SAYS U.S. IS A PILLAR OF STRENGTH IN THE WORLD ECONOMY

So we thought this might help…

 

If that is the world economy’s pillar of strength then we all have major problems.

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Gold futures are near the psychologically important $1300 once again as someone decided this morning was the perfect time to dump $4.7 billion notional gold into the futures markets…

Gold is back to Brexit day levels… as thedollar gains (amid EM outflows thanks to South Africa among other things)

 

Testing towards its 100-day moving average support at $1304

 

Silver is less affected for now…

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