Black Swan? Coincidental Lagging Index Falls to 88.6 (Like Everything Else)

The Conference Board’s Coincidental Lagging Index was released yesterday and it fell to 88.6 for February. Strangely, the S&P 500 index keeps rising as the coincidental lagging index keeps falling.


If we examine economic indicators from 1997-1999 (real median household income, M2 Money Velocity and Labor Force Participation Rate), we can see the decline in ALL variables since 1997-1999.


But at least investors are happy since the equities markets keep sailing along.


The infamous Hindenburg Omen is not flashing, but there still seems to be a large disconnect in the market.


I hope this doesn’t mean a Black Swan event is imminent!


Confidence Among U.S. Homebuilders Increases To 2006 Levels (Fed Helps)

Homebuilders are surprisingly confident given the lower real wage growth and real median household income since the housing bubble burst. The Fed’s zero-interest rate policy seems to be helping homebuilders, not the average citizen.

April 15 (Bloomberg) — Confidence among U.S. homebuilders rose less than forecast in April as sales and prospective buyer traffic stagnated, showing the residential real estate market struggled to improve after a harsh winter.

The National Association of Home Builders/Wells Fargo builder sentiment gauge climbed to 47 this month from a revised 46 in March that was weaker than initially reported, figures from the Washington-based group showed today. Readings greater than 50 mean more respondents report good market conditions. The median forecast in a Bloomberg survey called for 49.

Tight credit for some home buyers and limited availability of lots are restraining builder sentiment months after snow storms and freezing temperatures held back construction. At the same time, historically low mortgage rates and hiring gains helped drive an increase in the outlook for sales, the report showed.

Tight credit? Actually, there is plenty of credit if the borrower has sufficient income and assets as well as a good credit score.


Ah, could it be that The Fed’s Quantitative Easing is swelling homebuilder expectations? Hiring gains are going to have to be at higher wages than this economy is seeing.


Face it. The US economy hits its peak in 1997-1999 can has been asset bubbles ever since rather than wage and salary growth.


The Yellenburg Omen? NASDAQ Declines 3.10%, Dollar Spot At 5 Month Low

April 10 (Bloomberg) — U.S. stocks fell, with the Nasdaq Composite Index sinking the most since 2011, as technology shares resumed a sell-off on concern valuations are too high as earnings season begins. Treasury rates sank to a three-week low on speculation interest-rate increases won’t be accelerated.

The Nasdaq Composite Index sank 3.1 percent at 4 p.m. in New York to a two-month low that erased its gain this year. The Standard & Poor’s 500 Index lost 2.1 percent to the lowest since Feb. 19.


The 10-year Treasury note fell five basis points to 2.64 percent.


The Bloomberg Dollar Spot Index declined to a five-month low and the yen strengthened on a surprise drop in China’s trade figures. Gold jumped 1 percent to $1,318.30.


Investors returned today to selling the biggest winners in the five-year U.S. bull market, with Internet and biotechnology shares plunging. Bed Bath & Beyond Inc. tumbled the most in three months after warning first-quarter profit will fall short of analysts’ estimates. China’s exports slid 6.6 percent and imports declined in March, adding to concern that expansion in the world’s second-largest economy will deteriorate further.

The Hindenburg Omen (aka, the Yellenburg Omen) isn’t flashing red.


And the NASDAQ Composite index is below the Ichimoku trend lines.


Well, the wheels have come off of middle class income.



CoreLogic: Riverside CA House Prices Rise 22.2% YoY, Los Angeles, Atlanta and Houston Also Big Winners

According to CoreLogic’s February 2014 Home Price Index Report, former housing bubble casualties are leading the U.S. in house price gains.

Riverside, CA leads with 22.2% YoY growth in house prices, followed by Los Angeles at 18.8%, Atlanta at 16.7%, Houston at 13.6% and Phoenix at 12.5%.


Texas did not experience the devastating housing bubble burst that many other states experienced. Many states remain more than 20% below the housing bubble peak.


The Fed’s massive monetary expansion has helped investors purchase home and drive prices up.


Unfortunately, real median household income and mortgage purchase applications are not keeping pace.


An investor’s life for me (particularly with The Fed’s zero interest rate policy in place).


Fed Chair Yellen Admits Labor Market Struggling, More Stimulus Needed, Equities Soar

According to Reuters, Federal Reserve Chair Janet Yellen gave a strong defense of the central bank’s easy-money policies on Monday, saying its “extraordinary” commitment to boosting the economy, especially the still struggling labor market, will be needed for some time to come.

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy-makers at the Fed,” Yellen said at a community reinvestment conference.

Yes, the labor market is TERRIBLE! On her statement, the Dow Industrials jumped over 100 points.


Here is what concerns Chair Yellen.

Declining labor force participation and real median household income.


Absurdly high U6 unemployment rate and the long duration of unemployment.


Crashing M1 Money Multiplier and M2 Money Velocity with zero interest rate and a growing Fed Balance Sheet.


But the S&P 500 index keeps on chugging with with The Fed’s easy money policies.


Let me sum this up.

Winners: stock market investors
Losers: employment, wages

Yellen said “… the economy and the job market are not back to normal health.”

Ya think, Janet?

Decelernation: Declining Economic Indicators, But Not Federal Debt Or Fed Balance Sheet

Here are some charts you will NOT see on CNBC, Fox Business or any other program. It is the deceleration of key economic indicators such as M2 Money Velocity, Real Median Household Income, Labor Force Participation, the inverse of the GINI index of income inequality, mortgage purchase applications and the homeownership rate.


There are economic indicators that are increasing. The Federal government debt, the GINI ratio of income inequality, and The Federal Reserve’s Balance Sheet.


Let’s see. The U.S. Federal government has grown incredibly in recent years along with The Fed Balance Sheet (to support the purchase of Federal government debt and agency MBS), yet income inequality increases while homeownership, real income, money velocity, homeownership and mortgage purchase applications decrease.


US Treasury 30y Yield Lowest Since June ’13 (Mortgage Rates At June ’13 Level As Well)

Despite the relatively good real GDP print for Q4 2013 today, the U.S. Treasury 30 year yield dropped down to its lowest level since June 2013.


And BankRate’s 30 year fixed mortgage rate remains at June 2013 levels.


And the Fannie Mae current coupon rate to Agency MBS investors remains at June 2013 levels as well.


So the yield curve (30y-5y) has flattened to its lowest level since 2009 and mortgage rates are holding pretty constant since June 2013.


Real Personal Consumption Expenditures Rise To 2nd Highest Level Since End of Great Recession

The Bureau of Economic Analysis has some good news for the economy. Real Personal Consumption Expenditures (PCE) rose 3.3% in Q4 2013, the second highest level since the end of The Great Recession in July 2009.


Could it be that the unprecedented Fed stimulus (zero interest rate policy) is paying off?


Personal savings rates fell to the 2nd lowest level since the end of The Great Recession.


Save less, consume more. It’s almost like we are living in the movie “They Live!”


On a side note, George Mason University economist Tyler Cowen was pepper-sprayed when some young punk tried to perform a citizen’s arrest.


Fed Retreat From Mortgages Nears Tipping Point (Mortgage Originations Burned Out Back In 2003)

Nothing has been the same in the residential mortgage market since Alan Greenspan and The Fed cuts The Feds Fund Target rate numerous times in 2001. By the end of 2003, a massive mortgage origination bubble had formed and its been downhill since then.

March 27 (Bloomberg) -By Jody Shenn- The Federal Reserve is about to find out how well the mortgage-bond market can stand on its own.

Fed purchases of the securities that helped spur a housing recovery are poised to fall below growth in the $5.5 trillion government-backed market as soon as May, according to Nomura Holdings Inc. Last year, the Fed added twice as much of the debt as was created, suppressing yields that guide interest rates on mortgages.


The balance is shifting as the central bank steadily scales back its support of the U.S. economy at the same time home buying approaches its peak season. That creates a new challenge for a housing market that policy makers have been seeking to prop up since it crashed six years ago and threatens to inflate borrowing costs. Investors already are on edge over a Fed statement last week that fueled speculation it may raise short- term interest rates sooner than forecast.

“We’re within a few months of needing private demand to offset supply,” said Brad Scott, Bank of America Corp.’s New York-based head trader for a type of government-backed mortgage bond known as pass-through securities. “The hawkish statement from the Fed occurred at a precarious time for the asset class from a medium-term supply and demand perspective.”

A more-immediate test for the market comes next month, when issuance of the types of bonds the Fed is buying overtakes its purchases for the first time since November, according to Credit Suisse Group AG.

Even as the Fed took its first steps last year toward trimming its stimulus, its influence in the market grew when measured against the pace of issuance and outstanding bonds. That’s because the expected Fed pullback, which began in January, sparked higher rates and a slump in homeowner refinancing, which was followed by a seasonal slowdown in property sales. Loan volumes this quarter fell to the lowest since 1997, according to the Mortgage Bankers Association.

It is clear from the following chart that the decline in The Fed Funds Target Rate in 2001-2004 contributed to a massive surge in mortgage originations (1-4 family) and nothing has been the same since.

Real median household income has fallen along with originations. There just simply isn’t the demand left in the housing market.


The rentership rate in the U.S. began to climb after the 2003 spike in 1-4 unit mortgage originations.


It is difficult to light a fire under the housing market using 1-4 unit mortgages. There is no there there. No wonder The Fed is retreating.


Case-Shiller Home Price Index Declines For Third Month A Row As Household Income Stagnates

The typical headline reads “House Prices Increase 13.2% YoY.” But the reality is that the Case-Shiller 20 metro index has fallen for the third month in a row.


Both the CoreLogic House Price Index and the S&P Case-Shiller show slowing house price growth during January, despite Real Median Household Income lying flat as a pancake.


And The Fed keeps their massive foot on the gas pedal (Fed Funds Rate Target near zero).


We shall see what happens in March to house prices.

Fed-up! U.S. Devaluation Has Already Been Happening (Dollar Purchasing Power Down 96% Since Fed Creation)

Barry Ritholtz has an interesting opinion piece on Bloomberg View this morning entitled “Everything That’s Wrong With This Monday.”

“OK, listen up: You have been warning about the coming inflation, inevitable collapse of the dollar, why we need a sound currency, blah blah blah for five years. When the dollar plummeted 41 percent from 2001 to 2008 none of you geniuses even noticed. So thanks for the warnings about something that already occurred in the last decade. Please go away. Better yet: keep pouring your capital into gold and bitcoin.”


And consumer purchasing power fell 18.5% from the end of 2001 to June 2008.


While consumer purchasing power fell 7.2% from January 2008 to today.


But that is nothing compared to the decline in purchasing power after the creation of The Federal Reserve in 1913. That decline is a whopping 95.8%.




Missed It By That Much! U.S. Household Debt Service (Mortgages) And Fed Policy (Balance Sheet Expansion)

Don Adams of the TV show “Get Smart” has a great line where he would say “Missed it by that much.” Much like The Fed’s plan to print money (QE) and revive mortgage lending and the housing market.

Here is a chart from The Fed of household debt service (mortgages) versus The Fed’s massive balance sheet expansion.


Real median household income crash and stagnation is the likely culprit.


Missed it by that much!


Fed’s QE Policies Have WORSENED Income Inequality (Or Not Helped)

Either The Fed’s quantitative easing policies are worsening U.S. income inequality … or not doing anything to help.

2013′s GINI Coefficient is not yet available, but it does not look promising.


Homeownership has been falling along with real median household income and mortgage purchase applications and moving in the opposite direction of The Fed’s balance sheet expansion.


Welcome to Main Street, USA!


Fed Cuts QE By $10B Per Month As Main Street Continues To Lose Ground (Fed Lowers GDP Forecast)

The FOMC announced a third $10 billion reduction in quantitative easing, reducing its monthly bond purchases to $55 billion and keeping with Fed watchers’ tapering exceptions. The Fed will cut monthly mortgage bond purchases to $25 billion from $30 billion. Treasury purchases will go from $35 billion to $30 billion. The Fed Funds Target rate remained unchanged. Here is the statement.


The U.S. stock market has been tracking tracking The Fed’s balance sheet expansion quite nicely. Why rock the boat for investors?


Unfortunately for Main Street, we see continued declines in real median household income, labor force participation, M2 Money Velocity and Mortgage Purchase Applications.


The Fed lowered its GDP forecast slightly from December’s forecast.

Fed gdp guidance_0

The Fed also dropped it’s 6.5% unemployment guidance. Why? Because the economy is STILL terrible even with 6.5% unemployment. Why? Because real median household income is stagnant after plunging in 2008-2011.


Wait a minute! Should real median household income be RISING with declining unemployment rates?

Scooby doo, where are you? Main Street America needs you! And kick Janet Yellen out of the front seat of your car.


Redwood to Sell Mortgage Debt as Banks’ Loan Demand For Jumbos Saps Sales (Fed Encourages Bank Jumbo Purchases)

March 18 (Bloomberg) -By Jody Shenn- Redwood Trust Inc., the biggest issuer of U.S. home-loan bonds without government backing last year, is ending its four-month absence from a market that’s all but evaporated as banks compete with debt investors for the extra yield offered by private-label mortgages.

Redwood, which specializes in jumbo mortgages, is planning a sale tied to 429 loans with outstanding balances of $347.3 million, Fitch Ratings said today in a presale report. The Mill Valley, California-based firm is including “fully-documented
loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves,” the credit grader said.

The real-estate investment trust is returning to the bond market after saying last month it has been selling most of its mortgages without packaging them into securities. Banks have been buying or retaining home loans because it’s lucrative to do so with the Federal Reserve holding funding costs near zero, and because demand for other lending remains limited.


“We will always prefer securitization to selling whole loans for a number of reasons,” including “to ensure the long-term liquidity of our program,” Redwood President Brett Nicholas said on a Feb. 24 conference call for analysts and investors. Demand for top-rated securities has shown “clear signs of improvement” this year, he said.

Bundling loans into securities instead of selling them offers Redwood returns after issuance because it retains the riskiest slices. Redwood issued securities backed by about $5.6 billion of loans in 12 deals last year, according to data compiled by Bloomberg. Its last deal was in November.

Demand from banks for jumbo loans prompted JPMorgan Chase & Co. analysts this month to lower their forecast for 2014 issuance of non-agency, or private label, securities to $5 billion to $10 billion, from about $20 billion.

“The bank bid for loans is too strong relative to private label execution,” the New York-based analysts led by John Sim wrote in a March 7 report.

Here is the latest deal from Redwood, the Sequoia Mortgage Trust (SEMT) 2013-12x.


And here is the description for the A3 piece.


So, banks are bidding for high-quality, jumbo mortgages given The Fed’s cheap source of funding. Too bad the Mortgage Purchase Application Index remains in Death Valley. At least The Fed’s massive balance sheet expansion is helping banks buy jumbos!


3rd Largest Foreign Holder Of US Treasury Debt Is …. Belgium? (Inventors Of French Fries)

The 3rd largest foreign holder of US Treasury debt after China and Japan is not, Germany, France, UK, Canada of Switzerland. It’s … Belgium!


Belgium has really increased it’s holding of US Treasuries during late 2013 and into 2014.


Yes, Belgium which is only slightly larger than Northern Ireland.


And is the home of the ferocious tennis great Kim Clijsters.


Belgium is famous for beer, chocolate, waffles and french fries with mayonnaise. Contrary to their name, french fries are claimed to have originated in Belgium.

So, apparently, Amsterdam borrowed their penchant for drowning french fries in mayonnaise from the Belgians. (P.S. I tried french fries with mayo at Amsterdam’s Schiphol Airport. It wasn’t like any mayo I have eaten in the US. NASTY!)


Death Valley Days: The Decline in Savings Rates, Median Income, Mortgages and the Rise in Student Debt

Bank credit recently increased slightly to 2.5% YoY growth. While that is promising, it is far below the levels from 1995-2008. While 2.5% YoY is a positive change, it is still near the lowest growth rate following the 2001 recession.


Notice that The Fed’s massive expansion of its balance sheet with Treasury and Agency MBS purchases helped initially in increasing bank credit creation, but it wore off by 2013.

Mortgage debt is finally back in positive growth mode after a long period of declining and negative growth.


I talked with Bloomberg News’s Prashant Gopal about GSE legislation and how Crapo/Johnson has dropped the affordable housing mandates. I said that is may not matter because real median household income has been declining since 2000.
Using Sentier Research’s chart of median household income, you can see that it was essentially unchanged over 2013 and is lower than in 2000 by almost 8%.


Mortgage debt outstanding for 1-4 unit family residences is still below 0% growth and remains depressed with lower real median household income.


The personal savings rate had been falling in the U.S. since December 1973 when it was 14.4%. But since the end of The Great Recession in June 2009, the personal savings rate has fallen from 6.0% to 4.3% today with The Fed helping to drive down savings interest rates. Of course, The Fed’s model depends on shifting assets to progressively risky assets. Low interest rates have the effect.


Household debt service as a percentage of disposable income is now the lowest level since 1980.

But The Federal government student loan program has skyrocketed along with The Fed’s Balance sheet expansion.


Low interest rates have helped grow student loans and drive savings rates down. Unfortunately, due to stagnate household income, credit growth is curtailed for housing and is still below 0% YoY growth.

Wait for those poor students to try to purchase their first home while drowning in debt.



U Michigan Consumer Confidence Falls To Late 2007 Levels (WHY Is It So HIGH??)

The University of Michigan index of consumer confidence fell to 79.9, the same level as in late 2007.


Actually, it is quite surprising that consumer confidence is as high as it is, given that numerous economic indicators have collapsed since 2007.

What has dropped like a rock since 2007?

1. M1 Money Multiplier
2. Employment to population ratio
3. Mortgage purchase applications
4. Real median household income


And labor force participation and the M2 Money Velocity have also crashed since 2007.


But what hasn’t crashed and burned since 2007 are the stock market and house prices (red box). Along with The Fed’s juicing of financial assets. Particularly since Q2 2012 (orange box).


Hopefully, consumers are “confident” about rising house prices and the stock market. Because the base economy is as stale as month old bread.


Foreigners Sell +$100 Billion Of U.S. Treasuries (Biggest Drop Since QE Began)

According to the Federal Reserve’s H.4.1 Release of for the week ending March 12, Treasuries held in custody by the Fed dropped to $2.855 trillion (a decline of $104.5 billion). This was the biggest drop of Treasuries since quantitative easing began.


But compared to The Fed’s massive holdings of Treasuries and Agency MBS of $4 trillion+, $100 billion seems like small potatoes. BUT the divergence between The Fed’s Balance Sheet and Securities Held in Custody for Foreign Official and International Accounts (Marketable U.S. Treasury Securities) is quite noticeable.


Gold prices rose on the tension in the Ukraine and China’s emerging slowdown.


Gold has been rising since January 1st.


This is likely a Russia and/or China move.

From Russia (or China), with love.


Fed’s QE3 Enables Fannie Mae’s Preferred Share Price To Skyrocket, But Corker-Warner Taketh Away

The Federal Reserve’s massive balance sheet expansion has helped some and done little for others. One of those it has helped is Todd Westhus, an investor in Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar.

March 10 (Bloomberg) -By Jody Shenn- Todd T. Westhus is poised to join George Soros and John Paulson with an unlikely wager.

Soros broke the Bank of England in 1992 by betting on the devaluation of the British pound, netting $1 billion. Paulson took home $15 billion, anticipating the collapse of subprime debt that contributed to the financial crisis. Now, Westhus is trying to transform the $9.4 trillion U.S. mortgage market. The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar. Back then, the mortgage giants were just about given up for dead. Today, the companies are profitable and their shares have soared 24-fold.


Taxpayers rescued Fannie Mae and Freddie Mac in 2008 with a bailout that swelled to $187.5 billion, an amount the companies will finish sending back to the government this month. The issue for investors is that the Treasury Department decided in 2012 to keep all the companies’ profits. Perry sued the U.S. in July,saying the money sweep flouts the rule of law. Senator Bob Corker, a member of the Senate Banking Committee, said the firms’ staunchest supporter should be rewarded.

The companies would “be generating not one dime of revenue if it weren’t for the federal government,” Corker, a Tennessee Republican, said in an interview.

The preferred shares of the mega-GSEs have risen with speculation that Fannie Mae and Freddie Mac might survive. Then again, their preferred shares have risen with The Fed’s 3rd round of quantitative easing (QE3). Here is a chart of the preferred share price against The Fed’s Balance Sheet (yellow line).


The Fed giveth, and Corker taketh away.