Cohen Seeks Injunction To Stop FBI From Examining Materials Seized During Raid

Last night, Business Insider reported that Michael Cohen’s predilection for keeping digital recordings of his conversations with associates could become a major problem for him – and a major boon for investigators – should the FBI find anything incriminating on the tapes.

Which is perhaps why Cohen is seeking a temporary restraining order against the FBI to stop them from using some or all of the seized materials, according to Reuters.

Cohen

Meanwhile, Bloomberg reports that Cohen is planning to ask a judge to delay the civil lawsuit filed by adult film actress Stormy Daniels because of the FBI raid and Cohen’s newfound legal troubles.

Trump and Cohen say the criminal case “implicates” Cohen’s Fifth Amendment privilege against self-incrimination if he were questioned in the Daniels case, according to a filing in Los Angeles federal court.

“No decision has been made for Mr. Cohen to assert his Fifth Amendment rights,” Brent Blakely, a lawyer for Cohen, said in an email. “No questions have even been posed.”

Daniels sued to undo a non-disclosure agreement she signed in 2016 that she said was intended to silence her about a sexual encounter she had with Trump a decade earlier. Cohen has said that he paid $130,000 to Daniels out of his own pocket just before the presidential election and that he wasn’t reimbursed.

CNN reported this morning that Cohen taped copious conversations with other Trump associates during the campaign – and that these recordings are almost certainly now in the hands of the FBI. Some of those people are now worried that their conversations could incriminate them as well.

A hearing on the searches has been set for 10:30 am ET in a Manhattan federal courthouse.

Since news of the raid broke on Wednesday, details about what the investigators were looking for have slowly trickled out. Aside from materials related to the purported “silencing” of Stormy Daniels and former Playmate Karen MacDougal, the FBI was also reportedly looking for evidence of a $30,000 payment Cohen facilitated to a former Trump property doorman reportedly to stop him from spreading a rumor about a lovechild Trump allegedly fathered with an employee at one of his properties, the AP reported. 

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Banks, Boeing Batter Stocks Into Red

It all looked so rosy before the open. Banks were up, Boeing was up, The Dow was up… but then humans read the real details under the bank earnings, finally read about Russian sanctions, and saw headlines suggesting China did not fold on Trade Wars…

Boeing is ugly…

Banks have all turned red…

 

And as goes Boeing, so goes The Dow… as Futures tumble back into the red…

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UMich Consumer Confidence Tumbles Most In 18 Months

While UMich rose to a 14-year high in March, it was the “poor” that thrived while the “rich” were less confident. April’s preliminary print showed that weakness spreading as the headline sentiment index tumbled from 101.4 to 97.8 (missing 100.4 expectations).

Fewer households reported recent net income gains in early April than March (22%, down from 34%), but the median annual income increase consumers anticipated for the year ahead rose to 2.1%, up from1.7% in March and 1.6% last April

Surprisingly, all of the April gain was among Democrats and Independents.

Current conditions and Future expectations both fell…

Uncertainty surrounding the evolving trade policy has caused many small (and at times inconsistent) changes in expectations. Spontaneous references to trade policies were made by 29% of all consumers in early April, with nearly all the mentions negative (27% out of 29%).

Negative economic developments were reported more frequently than positive economic changes for the first time since last July. Negative economic news was cited by 66% in early April, up from 55% last month and 45% in January.

This drop is the biggest since Oct 2016 (before Trump’s election)…

Both short- and medium-term inflation expectations fell (medium-term back down to 2.4%, near its record low).

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Jimmy Carter Just Issued A Chilling Warning To Trump About Syria

Authored by Jessica Corbett via CommonDreams.org,

Former President Jimmy Carter has added his voice to those urging President Donald Trump to refrain from launching an illegal military attack on Syria, warning of the serious dangers – including nuclear conflagration – that could result.

“I pray that he would keep our country at peace and not exaggerate or exacerbate the challenges that come up with North Korea, in Russia, or in Syria,” Carter told The Associated Press about Trump’s recent threats.

“I hope he realizes very profoundly as I did, and as other presidents have done,” Carter continued, “that any nuclear exchange could involve catastrophe for all human beings.”

Carter pointed out that even a military attack that doesn’t escalate into a nuclear exchange “is a dangerous thing” that can unleash unpredictable consequences.

Anti-war activists are also pressuring Trump to proceed cautiously.

“There is no proof yet of a Syrian government gas attack,” noted Veterans for Peace President Gerry Condon. “Even if the reports are true, a military response will only lead to more death and destruction, and dangerous escalations.”

Condon also pointed to nuclear concerns—considering Russia’s support for Syrian President Bashar al-Assad.

“We are talking about a direct confrontation between the two nuclear superpowers,” Condon said.

“Why would the U.S. risk nuclear war over dubious chemical weapons claims?”

Pleas for restraint from peace advocates, members of Congress, international law experts, and at least one former president come amid mixed messages from Trump and an alarming report by Russia’s state-owned television station about possible war with the United States. 

In a news segment on Wednesday, as Common Dreams reported, one Russian anchor “explained to viewers how to prepare for a potential war by stocking a bomb shelter—while images of nuclear explosions were shown behind him.”

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Frontrunning: April 13

  • JPMorgan, Wells and Citigroup Earnings Top Expectations (WSJ)
  • TPP Nations Welcome Trump’s Interest, Don’t Want Renegotiation (BBG)
  • Trade war backfire: Steel tariff shrapnel hits U.S. farmers (Reuters)
  • Mob Boss? Slime Ball? Trump, Comey Trade Barbs Near Book Release (BBG)
  • Comey Compares Trump to Mafia Boss (WSJ)
  • Trump Forced to Juggle Syria Response, Rage Over Mueller Probe (WSJ)
  • Wells Fargo faces $1 billion fine to settle loan abuses (Reuters)
  • Companies Pressured to Pay More in Overtime Wonder If It’s Worth It (WSJ)
  • Volkswagen’s new CEO asserts authority as sets out on road to reform (Reuters)
  • Tesla May Be the Most Hated (and Loved) Stock in America (BBG)
  • Russia spied on Skripal and daughter for at least 5 years: UK (Reuters)
  • Trade-War Panic Is Hard to Find Outside Stocks (WSJ)
  • Catalan parliament calls for Spanish judge to be charged over jailed politician (Reuters)
  • The Aramco Accounts: Inside the World’s Most Profitable Company (BBG)
  • Russia lawmakers draft list of U.S. imports that could be banned (Reuters)
  • Mysterious Swiss Franc Slide Shows Reach of Russia Sanctions (BBG)
  • Trump lawyer tries to prevent use of materials found in FBI raid (Reuters)
  • Moelis Reminds Staff to Treat Young Bankers Well (BBG)
  • The Wall Street Era of Deducting $65 Steaks Could Be Over (BBG)
  • China’s Built a Road So Smart It Will Be Able to Charge Your Car (BBG)
  • Comcast will add Netflix to cable bundles in U.S. (Reuters)
  •  

Overnight Media Digest

WSJ

– U.S.-based private equity firms General Atlantic and Silver Lake Partners are planning to invest in Hangzhou-based Ant Financial Services Group, according to people familiar with the matter. (on.wsj.com/2GUNTTd)

– Wynn Resorts Ltd has been in talks to sell its partially built Boston-area casino project to rival MGM Resorts International according to people familiar with the matter, as Massachusetts regulators continue their investigation into the company’s handling of sexual-misconduct allegations against founder Steve Wynn. (bit.ly/2GW0vJK)

– The Trump White House, confident that its hard-line strategy is succeeding, is planning to ratchet up the pressure on China by focusing on new tariffs and threatening to block Chinese technology investment in the U.S., according to officials familiar with the strategy.(on.wsj.com/2GUdziN)

– John Smith, director of Treasury’s Office of Foreign Assets Control, or OFAC, will leave the position early next month, Treasury said Thursday. Smith’s departure was for personal reasons, according to several people familiar with the matter. (on.wsj.com/2GTQ0Xq)

– Volkswagen AG’s board ousted chief executive Matthias Muller and replaced him with Herbert Diess, who quietly orchestrated a boardroom coup while he was rebuilding the company’s namesake brand. (on.wsj.com/2GYguH6)

 

FT

UK Prime Minister Theresa May won backing from her Cabinet to deploy British forces in any U.S.-led action against Syrian President Bashar al-Assad’s regime, after an emergency meeting in Downing Street.

British Airways owner International Airlines Group is weighing a takeover offer for Norwegian Air Shuttle ASA , a low-cost airline after buying a 4.6-percent stake in it.

Czech cyber security company Avast Software said on Thursday it is targeting a $4 billion UK flotation in what would be one of the largest technology listings on the London Stock Exchange

 

NYT

– President Donald Trump, in a sharp reversal, told a gathering of farm-state lawmakers and governors on Thursday morning that the United States was looking into rejoining a multi-country trade agreement known as the Trans-Pacific Partnership, a deal he pulled out of days after assuming the presidency. nyti.ms/2EG7Res

– Trump abruptly issued an executive order on Thursday demanding an evaluation of the Postal Service’s finances, asserting the power of his office weeks after accusing Amazon.com Inc, the online retail giant, of not paying its fair share in postage. nyti.ms/2JEywMq

– A Colorado civic group, Together for Colorado Springs, is spearheading an effort to buy the Denver Post, which on Sunday excoriated its owner, a New York hedge fund, in its opinion section by saying, “Denver deserves a newspaper owner who supports its newsroom.” nyti.ms/2GUp6Pd

– Defense Secretary Jim Mattis sought on Thursday to slow down an imminent strike on Syria, reflecting mounting concerns at the Pentagon that a concerted bombing campaign could escalate into a wider conflict between Russia, Iran and the West. nyti.ms/2GVX2qC

 

Canada

THE GLOBE AND MAIL

Doug Ford says his first act as Ontario premier would be to fire the head of the partly privatized Hydro One and the utility’s board of directors if his Progressive Conservatives win power in June. (tgam.ca/2qs5jw2)

Ottawa is set to investigate allegations that Restaurant Brands International Inc has failed to honor commitments made to gain federal approval to buy Tim Hortons. (tgam.ca/2qp0UKz)

Canada’s Parliament will ask the Pope to reconsider his refusal to apologize to the Indigenous people who attended Catholic-run residential schools, and for the Catholic Church to make good on its financial obligations under the Indian Residential Schools Settlement Agreement. (tgam.ca/2qvNZWe)

NATIONAL POST

Battered by some of the lowest approval ratings in the country, Ontario Premier Kathleen Wynne said she considered quitting before this June’s election, but was encouraged to soldier on by the backing of her colleagues. (bit.ly/2INaC03)

 

Britain

The Times

– More high street banks and building societies have curbed the supply of credit to consumers over the past three months than at any time since records began in 2007, according to the Bank of England. bit.ly/2ILDnKk

– Britain could recover as much as 7.5 billion pounds ($10.67 billion)of unpaid taxes every year by digitising government, according to the International Monetary Fund. bit.ly/2v9tNiz

The Guardian

– Walt Disney will have to make a full takeover bid for Sky even if the competition regulator quashes Rupert Murdoch’s 11.7 billion pound attempt to buy 100 percent of Britain’s biggest pay-TV broadcaster, the UK takeover panel has ruled. bit.ly/2IPParc

– Hundreds of poultry workers in Scotland are to lose their jobs due to the closure of a plant belonging to 2 Sisters Food Group, which has been dogged by a controversy over food standards. bit.ly/2IPT3wk

The Telegraph

– U.S. private equity firm Apollo Global Management’s plan to buy rail operator FirstGroup Plc has already hit a hurdle due to the expected intense scrutiny from pension regulators and MPs keen to protect the retirement incomes of the Scottish company’s army of workers. bit.ly/2v9V9oD

– Royal Dutch Shell is shaking off fears that billions of dollars worth of oil and gas investment could be left in the ground as global governments push for a cleaner energy system. In its first major sustainability report the Anglo-Dutch group said it is confident that the business will remain resilient. bit.ly/2ILH9Du

Sky News

– British Airways owner IAG revealed it has acquired a 4.61 percent stake in Norwegian Air Shuttle “to establish a position from which to initiate discussions, including the possibility of a full offer for Norwegian”. bit.ly/2v7UPH0

– Carpetright Plc has said it is closing 92 stores resulting in 300 job losses as it fights for survival under a sweeping restructure. bit.ly/2v7VqIK

The Independent

– Metro Bank Plc chairman Vernon Hill is facing the prospect of an embarrassing shareholder rebellion after an investor hit out at more than 21 million pounds ($29.89 million)of payments from the lender to his wife’s architecture firm. ind.pn/2vaZhEX

– Goldman Sachs Group Inc might not have chosen to build its new European headquarters in London if the decision had been made after Brexit, the bank’s Chief Lloyd Blankfein said. ind.pn/2IQxU5j

 

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Goldman: “This Is the Largest And Fastest Correlation Change On Record Outside Of 1987”

Back on January 20, the day of Trump’s inauguration, Morgan Stanley pointed out a striking change to the cross-asset regime, noting that “We Haven’t Seen A Shift This Severe In Over A Decade“, after cross-asset correlations had plunged the most on record.

As we noted at the time, there were positive and negative consequences from this shift: from an economic perspective, the dramatic move was troubling because such a decline is common in ‘late cycle’ environments, as ‘idiosyncratic’ stories (company-specific M&A, tweets) become larger drivers than economic or earnings fears. The decline is directly linked to the lower realized volatility seen in credit and equity markets; when underlying components are moving in different directions, it is harder to get large shifts overall. In retrospect, the move also unleashed the record low-vol environment that characterized most of 2017… if not 2018.

At the same time, lower correlations meant a better ‘macro’ trading environment (since each market isn’t the ‘same’ trade), and has traditionally been said to usher in a “stock-picker’s market” (as opposed to a central bank-frontrunning market), although what it mostly ushered in was complaints by banks and hedge funds that “vol was too low.” That said, it is a mixed blessing for diversification, as it lowers overall portfolio volatility, but also makes hedging through ‘proxies’ harder.

* * *

Whatever the consequences of record low correlation may have been, however, they are now over because in a note released overnight, Goldman’s chief equity strategist David Kostin, shows that in a furious reversal of the January 2017 move, over the past 3 months, stock correlations within the S&P 500 have surged to the 95th percentile since 1980.

Specifically, average 3-month S&P 500 stock correlations have increased from just 9% in January to 52% today, a move which Goldman calculates was “the fastest and largest increase outside of 1987.”

Here Goldman throws in its two cents on what caused the initial move lower in correlations:

Average stock correlations declined to an all-time low of 9% driven in part by the creation of winners and losers from tax reform. However, stocks have become more correlated during the risk-off events since January. As our Options Research team highlighted, investors increasingly migrated to ETFs and other index products, offering little stock-level differentiation of the potential impacts from trade and regulation. Furthermore, the S&P 500 drawdowns YTD have come through broad valuation compression rather than earnings weakness, as economic activity has remained healthy.

One more notable thing: despite the two 10% corrections YTD, Goldman cautions that the pickup in equity volatility has been modest when compared with the rise in correlations. This dynamic has resulted in a decline in S&P 500 return dispersion and has made the environment difficult for stock-pickers, meaning that just like before, hedge funds will be complaining they can’t make money due to too much volatility, not to be confused with 2017, when they couldn’t generate alpha due to not enough vol.

What this means in practical terms is that if average stock correlations remain at current levels, the VIX will have to rise substantially:

The 24% increase in average implied stock volatility is smaller than typically associated with a jump in correlations of this magnitude. History would suggest that the 43 pp increase in average stock correlations would have   corresponded with a 36% increase in volatility. Previous stress periods such as 2008 and 2011, though more fundamental in nature, saw substantially larger increases in volatility.

So what happens next? Here Kostin’s underlying argument is that he “does not forecast a bear market or a recession this year” as a result “volatility is unlikely to rise by a sufficiently large amount for return dispersion to move meaningfully above the long-term average.”

It also means that Goldman expects “correlations will fall and push return dispersion higher in 2018.”

On the other hand, it also means that if correlations continue to rise as they have been doing, especially in the past 2 weeks when the entire market rises or falls by several hundred Dow points every day, Goldman will be wrong (again), and not only will stock picking get even more difficult, but the VIX is set to spike to new post-crisis highs, this time finally dragging the vols of all other asset classes with it.

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One Of Germany’s Richest Men Has Disappeared In The Alps

Karl-Erivan Haub, the CEO of the German retail group Tengelmann and one of the richest men in Germany, has disappeared during a routine skiing excursion in the Alps along the Italian-Swiss border, and though an extensive search operation is underway, his family members are fearing the worst.

Haub, who has led the German retail group since his father passed away unexpectedly in March 2000, has been described by family members as an avid Alpine skier. He was vacationing at a ski lodge near the Matterhorn when he didn’t show up for a meeting at a hotel in the Zermatti resort after taking a lift up the mountain earlier in the day. His family promptly notified police of his disappearance, per USA Today.

German

Poor visibility and the threat of an avalanche have hindered the search operation – much to Haub’s family’s dismay.

Haub was in Switzerland to train for the Patrouille des Glaciers ski race, a popular ski race organized by the Swiss army that was set to begin April 17.

In a letter to Handelsblatt, a German newspaper, the businessman’s brother, Christian Haub, wrote that Karl-Erivan was “a very experienced alpinist and skier” and that despite all the time that had elapsed since his disappearance, he hoped his brother would be found.

“Of course our family is prepared for such a situation,” Christian Haub said. If Karl-Erivan doesn’t return alive, “the business will continue to run smoothly and orderly,” Christian Haub promised.

Haub’s company, Tengelmann, is a major force in the German retail sector. With 73 holdings generating some €30 billion ($37 billion) in revenue, its owns businesses including hardware store Obi and textile discounter Kik.

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How Trade Wars Ignite And Why They’re Spreading

Authored by Charles Hugh Smith via OfTwoMinds blog,

The monetary distortions, imbalances and perverse incentives are finally bearing fruit: trade wars.

What ignites trade wars? The oft-cited sources include unfair trade practices and big trade deficits. But since these have been in place for decades, they don’t explain why trade wars are igniting now.

To truly understand why trade wars are igniting and spreading, we need to start with financial repression, a catch-all for all the monetary stimulus programs launched after the Global Financial Meltdown/Crisis of 2008/09.

These include zero interest rate policy (ZIRP), quantitative easing (QE), central bank purchases of government and corporate bonds and stocks and measures to backstop lenders and increase liquidity.

The policies of financial repression force risk-averse investors back into risk assets if they want any return on their capital, and brings consumption forward, that is, encourages consumers to borrow and buy now rather than delay purchases until they can be funded with savings.

As Gordon Long and I explain in the second part of our series on Trade Wars, financial repression generates over-capacity and over-consumption: with credit almost free to corporations and financiers, new production facilities are brought online in the hopes of earning a profit as the global economy “recovers.”

Soon there is more productive capacity than there is demand for the good being produced: this is over-capacity, and it leads to over-production, which as a result of supply and demand, leads to a loss of pricing power: producers can’t raise prices due to global gluts, so they end up dumping their over-production wherever they can.

If the producers are state-owned enterprises subsidized by governments and central banks, these producers can sell at a loss because their only function is to sustain employment; profitability is a bonus.

Over-capacity, subsidies and over-production force corporations to slash costs to maintain profitability. Cost-cutting is a never-ending process in a world stuffed with too much capacity: labor costs are slashed by offshoring factories and offices; quality is reduced by buying the cheapest low-quality components and scrimping on quality controls, R&D is trimmed and testing is hurried to get the next product cycle out early enough to maintain a slight competitive advantage.

As profits erode due to over-capacity, corporations turn to financial engineering to boost profits: profits come from either accounting trickery or stock buy-backs that reduce the number of outstanding shares.

With credit cheap and profits scarce, corporations borrow to survive.These become zombie corporations, kept alive only by super-low interest rates and ample credit.

Meanwhile, consumers have over-borrowed and over-consumed, taking on more debt than would have been possible in the pre-financial repression days.

As a direct result of these stimulus policies, private and public debt loads are expanding at rates far above the expansion of the real economy. This is why we read that each new dollar of debt is generating almost no real-world gains, as debt service consumes most of the “new money.”

Over-capacity leads to some nations over-producing, and cheap, easy credit leads to over-consumption in other nations. Both imbalances are the result of vast distortions in the incentive structure of the global economy, distortions created by the policies of financial repression: zero interest rates, ample liquidity, financial engineering, government subsidies for over-production, central bank policies keeping zombie corporations alive and so on.

As these distortions and imbalances start destabilizing domestic economies, political leaders turn to trade wars to stem the erosion of the domestic economy. Trade wars are the inevitable consequence of monetary stimulus that creates perverse incentives to borrow more than is prudent, over-produce, over-consume and use accounting trickery and financial engineering to maintain the appearance of fiscal health.

The monetary distortions, imbalances and perverse incentives are finally bearing fruit: trade wars.

Were Trade Wars Inevitable?

*  *  *

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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Rosengren: Economy Faces “Boom Bust”, “More Tightening Needed Than Market Pricing In”

Having long ago converted from a dove to a hawk, this morning Boston Fed President (and non-voter in 2018) Eric Rosengren warned that the U.S. economy could be derailed in a “boom-bust scenario” as unemployment drops more than his Fed colleagues expect, and as the Fed falls further behind the curve of rising inflation.

In a Boston speech, Rosengren warned that overheating and trade disputes represent biggest short-term threats to continued U.S. expansion, although his own views “are that labor markets may tighten more than the median SEP forecast suggests, and that inflation is likely to increase a bit more than the current median forecast by FOMC participants.”

“Therefore, I expect somewhat more tightening may end up being needed than is currently reflected in the projected median for the federal funds rate,” Rosengren warns, noting that the median from the Fed’s latest summary of economic projections is for three 2018 moves, including the hike made by the FOMC last month. This is to be expected, considering that Rosengren has previously hinted he is in the four-hike camp.

In his economic outlook, Rosengren projects unemployment will decline this year to 3.7% from current 4.1%; adds, “it is possible that unemployment will fall even more rapidly in the short-term.”

To Rosengren this is a troubling development, and he cited CBO data showing periods of significant and persistent unemployment overshoot have corresponded with recessions in last half century. The Boston Fed president also said spillover effects from trade disputes could cause economic disruption wider than implied by the value of U.S. exports relative to GDP.

Some more highlights from his speech”

  • “Unlikely that the economy would perform poorly in near term; monetary and fiscal policy remain accommodative, but accommodation may generate risks in long term”
  • “By using up so much fiscal capacity now, US risks not having sufficient fiscal capacity in the future when it might be needed, would be troubling if monetary policy could not aggressively offset adverse shocks.”
  • “Short-term risks include international trade, and an overheating economy”
  • “It would take a significantly broader set of trade actions than those reported to materially reduce US exports, but spillover effects are possible.”
  • “Trend falling import prices due to strong dollar appears to be changing more recently.”
  • “Long-term risks include reduced capacity of both fiscal and monetary policy to act against downturns.”
  • “Fed has been falling short of inflation goal due to the decline in the relative price of imports from 2014-2016, and the decline in telecommunications prices in early 2017.”
  • “Spreads between corporate bonds and 10-yr Treasuries has fallen to relatively low levels, notes studies have showing investor confidence that generates low credit spreads often precedes subsequent economic reversals.”
  • “FOMC outlook is fairly optimistic, but his outlook is firmer”
  • “Fed’s long-term interest rate forecast low by historical standards due to demographics slowing labour force growth and productivity.”

Then, during the Q&A Rosengren said that he sees a risk rates go back to zero in future recession, and warned that policy mistakes are what causes recession, adding that mistakes can come via fiscal or monetary policy. In which case the US has a 200% guarantee of a recession.

Finally, looking at the longer-term tisks, Rosengren said that the growing federal debt and lack of room for monetary policy response to a recession represent longer-term risks for U.S.

Now if only he, or Janet Yellen, had some idea whose permissive, record low interest rate policies allowed the US to pile up $21 trillion in debt, leading to the current “systemic risk” which suddenly everyone in the Fed is all too aware of…

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Wells Just Reported The Worst Mortgage Number Since The Financial Crisis

When we reported Wells Fargo’s Q4 earnings back in January, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, specifically in Q4 Wells’ mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion”, and just shy of the post-crisis lows recorded in late 2013.

Fast forward one quarter when what was already a grim situation for Warren Buffett’s favorite bank, has gotten as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to rebound, and remained at $24 billion, the lowest level since the financial crisis.

Yet while the mortgage pipeline has not been worse since the financial crisis, at least it has bottomed; what was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $63BN in Q4 to $58BN in the first quarter, down 2% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered just two days ago in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).

Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, plunging $10BN sequentially from $53 billion to only $43 billion, the second lowest number since the financial crisis. Since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter.

Adding insult to injury, as one would expect with the yield curve flattening to 10 year lows recently, Wells’ Net Interest margin – the source of its interest income – again failed to rebound from one year lows, and missing expectations once again. This is what Wells said: “NIM of 2.84% was stable LQ as the impact of hedge ineffectiveness accounting and lower loan swap income was offset by the repricing benefit of higher interest rates.” And visually:

There was another problem facing Buffett’s favorite bank: while NIM fails to increase, deposits costs are rising fast, and in Q1, the bank was charged an average deposit cost of 0.34% on $938MM in interest-bearing deposits, exactly double what its deposit costs were a year ago.

And finally, there was the chart showing the bank’s consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $9.5BN sequentially across all product groups, far more than the $1.7BN decline last quarter.

What these numbers reveal, is that the average US consumer can not afford to take out mortgages at a time when rates rise by as little as 1% or so from all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.

Source: Wells Fargo Earnings Supplement

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