From Russia With Love?

Russia Dumps US Treasuries As Rates Climb

As predicted, Russia has reduced its holdings of US Treasuries as US rates continue to rise.

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But Russia is a relatively small player in the US Treasury market (unless they are using proxies like postage-stamp sized Luxembourg, Ireland or the Cayman Islands).

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As The Federal Reserve SLOWLY unwinds its balance sheet, the Confounded Interest blog is surprised that Japan and China have not unloaded MORE of their Treasury holdings.

Source: Confounded Interest

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Mortgage Applications Collapse To 18-Year Lows

After sliding 2.1% the prior week, mortgage applications collapsed 7.1% last week as mortgage rates topped 5.00%

Ignoring the collapses during the Xmas week of 12/29/00 and 12/26/14, this is the lowest level of mortgage applications since September 2000…

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The Refinance Index decreased 9 percent from the previous week

The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 2 percent higher than the same week one year ago.

Perhaps this is why…

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since February 2011, 5.10 percent, from 5.05 percent, with points increasing to 0.55 from 0.51 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

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Still, The Fed should keep on hiking, right? Because – “greatest economy ever..” and so on…

As we noted previously, the refinance boom that rescued so many in the post-2008 ‘recovery’ is now over. If rates hit 5%, the pool of homeowners who would qualify for and benefit from a refinance will shrink to 1.55 million, according to mortgage-data and technology firm Black Knight Inc. That would be down about 64% since the start of the year, and the smallest pool since 2008.

Naturally, hardest hit by the rising rates will be young and first-time buyers who tend to make smaller down payments than older buyers who have built up equity in their previous homes, and middle-income buyers, who can least afford the extra cost. Khater said that about 45% of the loans that Freddie Mac is backing are to first-time buyers, up from about 30% normally, which also means that rising rates could have an even bigger impact on the market than usual.

Younger buyers are also more likely to be shocked by higher rates because they don’t remember when rates were more than 18% in the early 1980s, or more recently, the first decade of the 2000s, when rates hovered around 5% to 7%.

“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.

Source: ZeroHedge

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Mortgage Refinancing Applications Remain In Death Valley (Hurricanes Michael And Jerome)

Between Hurricanes Michael and Hurricane Jerome (Powell), mortgage refinancing applcations are taking a big hit.

The Mortgage Bankers Association (MBA) refinancing applications index fell 9% from the previous week as 30-year mortgage rate continued to rise.

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Mortgage purchase applications fell 5.52% WoW, but it is in the “mean season” for mortgage purchase applications and there was a hurricane (Michael). And then you have hurricane Jerome (Powell) battering the mortgage markets.

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In addition to Hurricane (weather and Federal government), there is also the decline in Adjustable Rate Mortgages (ARMs) since the financial crisis.

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Why Used Car Prices Are Plunging

(Blinders Off Research) We have been testing the upper limits of used vehicle pricing (and new) all year. I think we have finally reached a point where the consumer has started rejecting higher prices (used vehicles for now). There were a couple of events last month that raised concern ahead of the most recent used car and truck CPI report:

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2. There was a significant drop in used vehicle values during the last week of September.

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The sudden increase in used vehicle inventory is a strong signal that the rate of sale has slowed due to price increases that consumers are not willing to absorb. Most retail dealers have a rigid 60-day cut off for used vehicle inventory. As a vehicle nears the 60-day mark, the dealer is forced to heavily discount that vehicle or face an even greater loss by disposing of it through wholesale auction (60 days of depreciation, reconditioning expense, transportation and auction fees). This is also likely related to the sharp drop in used vehicle values during week 4 of September as retail dealers returned to auction and adjusted their bids after realizing the vehicles they previously purchased did not sell at the prices they anticipated.

New and used inventory levels are still showing a draw YTD, but the rate of change is concerning. I am completely convinced that the strength we’ve seen in both new vehicle volume and pricing this year is due in large part to the incredibly strong performance in used vehicle values. If the recent trend in used vehicle values changes, things could get ugly and FAST!

Additionally, take note of the dip in time to equity from 2006-2007 and how similar it is to the dip in 2018. It took this year’s used vehicle appreciation  in order to offset the consistent increase in loan terms since 2009. If used vehicle values roll over, we have the same exact setup that led to the spike in time to equity from 2007-2008.

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I would take the drop in used car and truck CPI as a serious warning with larger implications to come. I am still confident in Q3 earnings for manufacturers, retail dealers and rental car companies but would proceed with caution going forward.

Source: ZeroHedge

Violence, Public Anger Erupts In China As Home Prices Slide

(ZeroHedge) Last March, we discussed why few things are as important for China’s wealth effect and economy, as its housing bubble market. Specifically, as Deutsche Bank calculated at the time, “in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice their total disposable income of RMB12.9 trillion.” The German lender added that this (rather fleeting) wealth effect “may be helping to sustain consumption in China despite slowing income growth” warning that “a decline of property price would obviously have a large negative impact.”

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Naturally, as long as the housing bubble keeps inflating and prices keep rising, there is nothing to worry about as the population will keep spending money buoyed by illusory wealth appreciation. It is when housing starts to drop that Beijing begins to panic.

Fast forward to today, when Beijing may be starting to sweat because whereas Chinese property developers usually count on September and October to be their “gold and silver” months for sales, this year has turned out to be different. As the SCMP reports, not only were sales figures grim for September, but the seven-day national holiday last week also brought at least two “fangnao” incidents – when angry, and often violent, homeowners protest against price cuts offered by developers to new buyers.

These protests are often directed at sales offices, with varying levels of intensity – from throwing rocks to holding banners and putting up funeral wreaths. The risk, of course, is that as what has gone up (wealth effect) will come down, and as home ownership has remained the most important channel of investment for urban households in China in the past decade, price cuts have become increasingly unacceptable and a cause for social unrest.

Just last week, angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.

A similar incident took place in suburban Shanghai, where the same developer slashed prices at another project called One Mansion by a quarter.

While the protests have been isolated so far, the risk is that the greater the slide in property prices, the more widespread popular anger will become:

“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities.

Or fall at all, for that matter.

While China’s stock market has had its ups and down, along the way accompanied by various “rolling” bubbles affecting assored Chinese assets, China’s property market has soared since the 2000s making home ownership the quickest way to gain wealth. In Beijing, homes that went for an average of around 4,000 yuan (US$580) per square metre in 2003 are now above 60,000 yuan (US$8,600) a square metre, according to property price data provider creprice.cn.

And, in a page right out of Ben Bernanke’s playbook, who in 2005 claimed that “we’ve never had a decline in housing prices on a nationwide basis” and as a result never would, what is now taking place in China is nothing short of a shock to the general population: “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao said.

Meanwhile, dreading that this moment would eventually come, the government has been working on measures to cool property prices for years, calling residential real estate not only an economic issue but also “an important issue for people’s livelihoods that influences social stability”, in a directive back in 2010.

And while the industry remained strong in the first eight months of the year it started slowing last month, according to data provider China Real Estate Information Corp. Official statistics showed that in Shangrao, where the violent protest occurred, transactions of homes last month fell by 22% from August and 18% from the same month last year. In Shanghai, sales in the past five weeks have risen slightly from the same period last year, but average prices dropped in September by over 3% from August and 1.4% from the same period last year.

Quoted by SCMP, Zhang Dawei, chief analyst at Centaline Property, warned that not only were the overall sales dropping, but poor construction quality could also be a cause for more violence. “Try not to buy homes built in 2018, because while the developers were short of money, the same is the case with contractors,” he said, and had an even more ominous warning about what’s coming: “The fourth quarter would be a peak time for residential project completion. Issues which used to be papered over by rising prices could erupt in this period… so we should look out for a sudden surge [public violence] in the coming months.”

Ultimately, it’s all a question of public expectations: expectations that have been number following years of government bailouts and bubble reflating, making sure that every single drop in housing was promptly offset.  Hu Xingdou, a Beijing-based economist, said despite China’s market-oriented reforms 40 years ago, investors still lacked respect for market and social rules.

“They don’t have the spirit of contract, and they always think they can fight against the rules,” he said. “As a commodity, the value of homes can both rise and fall. Investors should obey this fundamental rule.”

But why should they if until recently, policymakers did everything in their power to avoid them this simplest of lessons.

To be sure, public anger at falling prices is hardly new. Rampaging against price cuts was first seen in 2011, when homebuyers of a residential project named Oriental Rose in Beijing’s Tongzhou district mobbed a Huaye sales office after the firm cut prices by a tenth.

Similar incidents have erupted whenever investors have found their property value depreciating. And, in a country where there are relatively fewer investment channels and an unpredictable stock market, such protests are always couched as a struggle to protect individual rights. In many such cases, protesters demand compensation or cancellation of their purchase, and in order to prevent further social disorder, developers often accept their demands.

In other words, moral hazard in China is so pervasive, it threatens the very fabric of society.

Wang Cailiang, director of the Beijing Cailiang Law Firm, said although fangnao was against the law, the government had tolerated such protests because it was ultimately responsible for the surging prices; and it is better to punt to the real estate company than being forced to directly bailout consumers.

“It was the government that pushed up the prices by profiting from selling land to developers in the past two decades,” he said. “Now public anger over home prices has become a major social issue.

At a meeting of the Communist Party’s Politburo in late July, top officials reiterated that “containing home price gains” would be a priority in the second half of the year. Of course, if home price losses accelerate to the downside, Beijing will have no choice but to scramble and reflate another bubble, even as the Trump administration scrutinizes every monetary and fiscal decision by Beijing with a fine toothed comb.

Meanwhile, anger is only set to grow, the only question is whether it will be a slow boil or a violent eruption. Economist Shao expected average home prices to drop slightly in the coming months as the government continued efforts to control them.  In the first two weeks of September, growth was close to stagnating in 40 major cities across the mainland with the total number of new home sales up by just 1% from the previous month, according to China Real Estate Information Corp data.

Should this slowdown accelerate significantly to the downside, then the “working class insurrection” that China has been preparing for since 2014…

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… will finally materialize with dire consequences for the entire world.

Source: ZeroHedge

SF Bay Area Realtor Caters To Mass Exodus Out Of The Region

A real estate brokerage near San Francisco is capitalizing on the mass exodus out of the Bay Area. 

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According to an April report by a Bay Area advocacy group, 46% of locals say they want to move out of the area within the next few years, citing the high cost of living and skyrocketing housing prices as main reasons for wanting out. In February, CBS San Francisco reported that the number of people packing up and leaving the Bay Area has reached its highest level in more than a decade. And fo the first time in ages, the number of people leaving are outnumbering the people coming in.

Meanwhile, a statewide poll conducted by UC Berkeley last year revealed that 56 percent of voters have considered moving due to the housing crisis – and 1 in 4 of those residents said they’d leave the state.

Some are already making good on that promiseData from earlier this year confirms that Sacramento is experiencing its highest rate of domestic migration in over a decade.

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Catering to the exodus

To serve the real estate needs of soon-to-be former Bay Area residents, East-Bay broker Scott Fuller – a real estate broker of 18 years, launched LeavingTheBayArea.com, which helps clients design a relocation strategy. After helping clients sell their home “within a timeframe that works for you,” Fuller will “partner you up with a real estate specialist” in the desired destination city in order to perform an “in-depth needs analysis” in order to coordinate the move.

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Fuller says that the majority of his clientele are retirees looking to cash out and move to cheaper pastures in areas such as Portland, Las Vegas, Reno, Dallas, Austin and cities in Arizona. Those looking to remain in California have been moving to Folsom and El Dorado Hills.

Source: ZeroHedge

Strategic Relocation: Are You Missing Out?

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The concept of strategic relocation is not new, but it’s recently become more popular, as more and more liberty-loving folks get tired of being crammed into crowded public transportation or spending hours on the road in the daily snail-pace commute. For many, the thought of leaving everything can be a bit terrifying, and if you have a family who doesn’t want to leave, you might be thinking that your Big Move is more of a pipe dream than a real possibility, even though you see the death grip on your everyday freedoms tightening by the day. Here’s the truth: it can be done. And yes, you can be amazingly happy in a new location that is more conducive to the type of life you want to live.

Just like changing your physical condition requires time, discipline, and effort, so does changing your permanent residence. Add to that a lot of planning, and you’ll see yet another reason why a lot of people don’t do it. Before we get into how to effectively and efficiently plan such a move, however, let’s look at why you might choose that path — or at least, why you’re probably interested in the idea. Over the next few days we’ll go through the process of aligning your thought process, getting down to brass tacks, and even what you should be doing when you get to your new location.

Why Move?

Maybe you live in a high-crime neighborhood. Contrary to what society will tell you these days, moving because you don’t want to deal with crime, homeless camps, drug addicts, or other social problems and vices does not make you a racist. If you want a safer environment for your family, then moving might be your best bet. When I first purchased my home in a quiet lake community north of Seattle, it was a great environment for my kid to grow up, with lots of opportunities. A few short years later, within a five block radius, there was a convicted rapist, a chop shop, a meth house, two shootings, and a hotbed of criminal activity on the next corner. That’s not counting the commute, which more than doubled in time due to exploding population. It was time to go, and I don’t regret making that move one bit. It was hard — and it continues to be. For us, it’s worth it, and we would never even consider leaving our little farm.

There is a long list of reasons why moving out of the city is an excellent choice; if you’re already considering it, then you’ve probably already thought of at least some of these:

  • Crowds
  • Crime
  • Traffic/Long commutes
  • Nosy neighbors
  • Inability to become truly sustainable
  • Lack of room for storing preps or other necessities
  • Higher prices and cost of living
  • Draconian HOAs and suburban “beautification” organizations
  • Gun laws
  • Overregulation, ordinances, taxes, levies, and all the related idiocy
  • Wanting to get your kids out of public schools
  • Lack of like-minded attitudes or political/religious ideals

Another thing you might be dealing with in your area is the locale’s natural disaster type. Everything is a trade, and while preparing for natural disaster is somewhat the same regardless of where you live, each area has its own specific challenges that you might not be okay with.

If you live in an urban or even suburban area, you might also find that you’re having a hard time finding people who believe as you do, whether that be your worldview, politics, or religious belief. Like it or not, harassment is a very real thing—and not in the ways the media would have you believe. Being liberty-minded, religious, or even just the wrong color in certain areas can get you in big trouble—and that goes for anyone. Regardless of what race you are, there are places you aren’t welcome.

The reasons to move are many, and the bottom line is that you don’t need to justify those reasons to anyone. What matters is what’s best for you and your family, and if that means pulling stakes, then so be it. If you’re set on moving, let’s talk about how to make it happen.

Choosing a Location

Once you’ve outlined your reasons for moving (thereby outlining what you’d need in a new location), you’ll need to figure out where to go. Do you just move to a different neighborhood? Out of the city into a nearby suburb? Do you stay in the same state but move to a rural locale? Or do you go all out and move to a different part of the country?

A lot of this will depend on what your reasons for moving are. If state gun laws are an issue for you, for instance, then you’ll probably need to move out of state. If you just want to be able to see your kids go to a less violent or better school, you may be able to get away with just moving to a different neighborhood. If you’ve ever wanted to try your hand at homesteading, you’ll be looking at states where that’s being done successfully.

If you use social media, you can look at groups that are local to the area you’re interested in moving to, to get a feel for the culture. Read their local paper, maybe even pull up the radio frequencies for their local police and fire and listen to the type of calls they’re dealing with on a daily basis. Are they getting a lot of overdoses? Shootings? What area of the town or county are the calls coming from? Are they places you can avoid? Is the crime location-based (such as a specific block or business) or is it widespread all over the county? If you notice over the course of a few weeks of paying attention that a specific street gets a lot of calls, or maybe the cops get called to a certain bar for fights, you can avoid that problem by simply not going to that location.

Look up the laws in your proposed new locale and see what’s considered legal and what’s not. You may very well choose to ignore certain laws in your quest for more freedom, but you should at least be able to make an informed decision about what you’re choosing, and what the potential consequences are so you can mitigate any potential fallout.

Check the county zoning laws and building permit requirements, too. One person I know found the perfect off-grid home—only to find that it was sitting just on the wrong side of the county line, in a location where the county wanted permits for everything and lots of taxes and fees. They chose to pass on that house and went to a county where there are no building permits, and no one cares what they do on their land.

Before choosing a location, you can also pull up all manner of data on everything from average income and education level to demographics, home prices, economic growth, and anything else you’d like to know. It all depends on what kinds of information you seek, and whether you’re willing to do the research. You’re never going to find the perfect place; you can, however, find something that fits the non-negotiables. Check out the local weather too, and keep in mind what will be expected in that area. Are you choosing a place with hard winters? Super-hot summers? Higher altitude? Before you throw out the idea of living in a place with rough winter, for instance, keep in mind that there are positives to everything. Snow runoff, for instance, can help you water your garden months later during a drought if you’ve thought ahead in terms of collection. And after the busyness of spring and summer, you’ll look forward to winter, when you have a freezer full of meat, shelves and root cellar packed with food, enough firewood to keep the house warm, and lots of time to work on indoor projects or study new skills in preparation for spring thaw.

One more thing—be aware of any tourist attractions, natural wonders, or other curiosities in your area. They draw crowds and everything that goes with them. You might have your heart set on living in the mountains of Wyoming—only to later realize that you moved too close to Yellowstone National Park and now have tens of thousands of people clogging your local area for half the year.

Taking the Next Step

Once you’ve decided on a location (or at least narrowed it down to 2), it’s time to talk funding. Look at average rents/mortgage payment amounts. You may need to rent a smaller place until you can buy. You may want a bit of land to raise animals. You may choose to live remotely or in a small town near a larger area. If your ultimate goal is to get as off-grid as possible, understand that you’re not going to want to go directly from an urban or suburban environment directly to a place where you have no electricity and have to haul water. You and your family will get frustrated very fast, and you’ll be tempted to move back. Start small; rent a place with a well and power.

Above all, be realistic about how it’ll be. The first year is really, really hard. The second year is a bit easier but it’s still difficult. Don’t be tempted to show up and assume you’ll be able to be fully sustainable within a year. You’ll learn some hard lessons; those lessons, however, will not only make you stronger, but you’ll find that you’re able to adapt better for the next situation. You’ll learn to use what you have instead of running to the store for everything. Depending on where you end up, you may find that certain times of the year require you to prepare, or forego certain activities in favor of making your life easier later. You’ll learn that at least part of each season is spent preparing for the next one, or getting done various tasks that need doing. There’s a routine to it, however, and over time you’ll also find that you are emotionally attached and invested in your homestead. It’s something you’ve worked on and sweated over, and it helps you survive. If you can find your spot in a state or area that is also more liberty-minded than where you are, you’re doubly blessed.

If you’ve read this far and aren’t interested in taking the leap of faith, that’s fine too — there are those who believe that freedom can be found anywhere. Ultimately, it’s your choice, and you don’t have to defend that to anyone either. For those who can smell the fresh air and imagine a different life for yourself and your family, however, stay tuned. Tomorrow we’ll talk about where you’ll find the money to make it happen.

Source: by Kit Perez | American Partisan

Wells Fargo Just Reported Their Worst Mortgage Number Since The Financial Crisis

(ZeroHedge) When we reported Wells Fargo’s Q1 earnings back in April, 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, sliding just shy of the post-crisis lows recorded in late 2013.”

Then, a quarter ago a glimmer of hope emerged for the America’s largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.

However, it was not meant to last, because buried deep in its presentation accompanying otherwise unremarkable Q3 results (modest EPS miss; revenues in line), Wells just reported that its ‘bread and butter’ is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.

Yet while the mortgage pipeline has not been worse in a decade despite the so-called recovery, 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 $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered recently in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).

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Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, dropping  $4BN sequentially from $50 billion to just $46 billion. And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.

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That said, it wasn’t all bad news for Wells, whose Net Interest Margin managed to post a modest increase for the second consecutive quarter, rising to $12.572 billion. This is what Wells said: “NIM of 2.94% was up 1 bp LQ driven by a reduction in the proportion of lower yielding assets, and a modest benefit from hedge ineffectiveness accounting.” On the other hand, if one reads the fine print, one finds that the number was higher by $80 million thanks to “one additional day in the quarter” (and $54 million from hedge ineffectiveness accounting), in other words, Wells’ NIM posted another decline in the quarter.

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There was another problem facing Buffett’s favorite bank: while true NIM failed to increase, deposits costs are rising fast, and in Q3, the bank was charged an average deposit cost of 0.47% on $907MM in interest-bearing deposits, nearly double what its deposit costs were a year ago.

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Just as concerning was the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion. This was driven by consumer and small business banking deposits of $740.6 billion, down $13.7 billion, or 2%.

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But even more concerning was the ongoing shrinkage in the company’s balance sheet, as average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY driven by “driven by lower commercial real estate loans reflecting continued credit discipline” while period-end loans slipped by $9.6BN to $942.3BN, as a result of “declines in auto loans, legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans.”  This is a problem as most other banks are growing their loan book, Wells Fargo’s keeps on shrinking.

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And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $11.3BN Y/Y across most product groups.

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What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent 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 |ZeroHedge