Category Archives: Uncategorized

The Biggest Home Price Drops Are In These 10 Cities

As the US housing market deteriorates, the shift to a buyer’s market accelerates, says Knock, a home trade-in online service. The 2Q19 National Knock Deals Report predicts that U.S. markets will have the highest percentage of homes that sell at discount versus the list price, in many years.

https://www.zerohedge.com/s3/files/inline-images/price%20cuts%20sign.jpg?itok=TsLLIrmQ

Knock projects that 75% of current listings will sell below their list price within the current quarter. While this is slightly lower than the 1Q19 forecast of 77%, it reflects a significant y/y increase (7% y/y) as the housing market starts to turn.

“The Q1 Forecast, which may have seemed to be a big jump over 2018, was actually much closer to the reality of home sales in Q1 2019 than home sales at the same time last year, or even at the end of 2018,” said Jamie Glenn, Co-Founder and COO at Knock. “It’s clear that we’re at an inflection point in the shift to more of a buyer’s market, and the Q2 Forecast provides insights into where and how buyers can capitalize on that.”

Six out of the ten cities on the list were located in Southern markets. Knock said the increase of Southern markets is a 40% increase over the last quarter.

Providence, RI; Cleveland, OH; New York, NY; and Chicago, IL were the other four markets that made the list.

The report noted that the four markets in Florida ( Miami, Tampa, Jacksonville, and Orlando) were hit the hardest by price reductions.

In Miami, the report says about 88% of single-family home sales in 1Q19 sold below original list prices. Average days on the market of Miami homes sold in 1Q19 were 82, which plays a significant role in discounting.

https://www.zerohedge.com/s3/files/inline-images/home%20price%20cuts%202q.png?itok=S3qDz-xT

“This seems like an interesting telltale that the market is shifting in favor of buyers,” Knock Chief Executive Officer Sean Black told Bloomberg in a phone interview. “Florida is a popular secondary home destination so it tends to drop faster in a downward market because it’s losing buyers, both domestically and internationally. Everybody needs a primary home. Not everybody needs a second home.”

Back in September, we outlined that “existing home sales have peaked, reflecting declining affordability, greater price reductions, and deteriorating housing sentiment.”

https://www.zerohedge.com/s3/files/inline-images/Screen-Shot-2018-09-22-at-7.20.10-PM_1.png?itok=rTP3ODfl

Greater price reductions, more inventory, and more days on the market is a recipe for a significant downward impulse in home prices across the country.

So if you haven’t called your realtor – maybe now is the time before the market goes bust.

Source: ZeroHedge

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HUD Is Preparing To Address Rising FHA Loan Portfolio Risk With Tighter Credit

https://www.scotsmanguide.com/uploadedImages/ScotsManGuide/News/News/2018/11/FHAloan.1.jpg

(Source: by Victor Whitman | Scotsman Guide) Changes are likely to come soon that will make it harder for prospective borrowers to obtain Federal Housing Administration (FHA) loans. It’s all part of an effort to dial back loosening credit standards that have seen FHA borrower debt loads and cash-out refinancing activity rise to record levels, top officials with the U.S. Department of Housing and Urban Development (HUD) told reporters on Thursday.

“We will be making some additional changes soon,” said FHA Commissioner Brian Montgomery during a morning conference call. HUD released its fiscal 2018 annual report to Congress on the health of the FHA insurance fund.

“I couldn’t give you an exact date, but again we want to find that critical balance between providing people with the opportunity for sustainable home ownership, but again we have to maintain the right balance and protect taxpayers against risk.”  

Montgomery didn’t reveal any specific plans on where the tightening may occur, but indicated cash-out refinancing activity was in the cross-hairs of the agency.

In a year where refinances dropped dramatically, FHA’s cash-out counts rose 6percent, to 150,883, in fiscal 2018.

“Cash-out refinances, both as a percentage of our over all business and our refinance endorsement volume, are growing astronomically,”Montgomery said. Cash-out refinances comprised nearly 63 percent of all refinance transactions in fiscal 2018, up from nearly 39 percent last year, he said.

“The increase in cash-outs presents a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”

Montgomery said rising debt-to-income (DTI) ratios are another major concern.

“Almost a quarter of our forward-purchase business was comprised of mortgages in which a borrower had a DTI ratio above 50 percent,”he said. “That is the highest percentage since 2000. When you couple that with a trend of decreasing average credit scores — 670 this year versus 676last year and the lowest average since 2008 — most underwriters and housing-finance experts will say that managing this type of risk without corresponding scrutiny becomes problematic.”

Montgomery also said HUD has concerns about the jurisdictional right and the extent to which government entities, such as state housing-finance agencies, provide down payment assistance to FHA borrowers.  

Montgomery also indicated that HUD will not be cutting FHA insurance rates in the near future.

“While the [insurance] fund is sound at this point in time,I think we are still far away from being in a position to consider any reduction in our mortgage-insurance premium,” he said.

HUD’s insurance fund ended the 2018 fiscal year in September in better shape than the end of fiscal 2017. The net worth of the fund increased to $34.9 billion, up $8.12 billion at the end of fiscal 2017. The fund’s capital ratio, a closely watched metric that compares the net worth of the fund to the dollar balance of all active insured loans, stood at a 2.76 percent, up from 2.18 percent at the end of fiscal 2017. This was the fourth-consecutive year that the capital ratio has been above Congress’s mandated 2 percent threshold, a level it considers sufficient to sustain losses without government intervention.

The overall fund, however, was once again dragged down by FHA’s reserve-mortgage program, known as the Home Equity Conversion Mortgage (HECM). Reverse mortgages are loans that allow seniors to tap their home equity and remain in their homes for life. They represent a small portion of all FHA-insured loans, but have had an out sized impact on the risk to the fund.

The FHA portfolio of HECM-insured mortgages was estimated to have a negative value of $16.3 billion. The reverse portfolio also had a negative capital ratio of 18.83 percent.

By contrast, FHA’s regular forward-loan portfolio — loans commonly taken out by first-time home buyers  — had an estimated positive value of $46.8 billion and a healthy positive capital ratio of 3.93 percent.  

Montgomery and HUD Secretary Ben Carson, who also joined the morning call with reporters, said that elderly borrowers in the reverse program are being subsidized to an unsustainable degree by the typically lower-income,often minority, first-time home buyers in the FHA’s forward-loan program.

“We are committed to maintaining a viable HECM program, so seniors can continue to age in place, but we can’t continue to see future HECM books being subsidized by our forward-mortgage programs,” Montgomery said. “It is not beneficial to anyone, including taxpayers.”

HUD has taken steps to tighten the program already,including most recently requiring a second appraisal on homes where the value could have been inflated. Montgomery said FHA is working on a plan to conduct a census of all families who live in homes with a HECM mortgage.

Mortgage Bankers Association President Robert Broeksmit said HUD’s scrutiny of FHA’s credit standards was “prudent.” 

“We are glad to see that FHA is closely monitoring the increasing risk in the forward portfolio, indicated by rising debt-to-income ratios, declining credit scores, and the increasing use of down payment-assistance programs,” Broeksmit said. “While current FHA delinquencies are quite low, it is prudent to keep an eye on these trends to ensure the program does not face undue challenges if, and when, the economy and job market cool.”

Broeksmit also noted that MBA has previously drawn attention to the HECM portfolio’s drain on the fund, and supported recent tightening moves.

“Policy makers should continue considering ways to insulate the forward program from the volatility in the reverse program,” he said.  

That HUD might crack down on FHA-lending standards is worrisome for non-banks, however. Non-banks are now originating the bulk of FHA loans today. Reacting to the report,  non-bank trade group the Community Home Lenders Association (CHLA) said HUD should loosen restrictions on the program by eliminating an Obama-era requirement that borrowers hold FHA insurance for the life of the loan.

“CHLA also renews its call for a cut in annual premiums, a move justified by FHA’s strong financial performance,” CHLA Executive Director Scott Olson said.

Chinese Fetanyl Kingpins Laundered Over $5BN Through Vancouver Homes Since 2012

https://www.zerohedge.com/sites/default/files/inline-images/Vancouver%20skyline.jpg?itok=Ur85d6IyDowntown Vancouver Skyline

A new “secret” police study has found that Chinese crime networks could have laundered over $1B through Vancouver homes in 2016 alone, and that a surge in the city’s home prices are simultaneously tied to a surge in opioid deaths. 

The report examined over 1,200 luxury real estate purchases in British Columbia’s Lower Mainland during that year, and concluded that over 10% were tied to buyers with criminal records. Crucially 95% of those transactions could be definitively traced by police intelligence back to Chinese crime networks.

While the study only looked at property purchases in 2016, an analysis by Global News suggests the same extended crime network may have laundered about $5-billion in Vancouver-area homes since 2012Fentanyl: Making a Killing

Since 2016 we’ve chronicled the “dark side” behind the Vancouver real estate bubble, which it turns out has long been a bubbling melange of criminal Chinese oligarch “hot money”, desperate to get parked offshore in any piece of real estate, but mostly in British Columbia regardless of price.

A number of investigations have since uncovered extensive links – including money laundering and underground banking – between China’s criminal underworld and British Columbia drug and casino cash and VIPs, as well as their connections to China, Macau and the notorious triads. These investigations have found much of the B.C. real estate bubble can be explained as nothing more than the “layering” and “integration” aspect of a giant money laundering scheme involving billions of dollars of Chinese hot money and the criminals behind it.

On Monday the new bombshell study revealed just how extensive and growing this Chinese underworld racket remains and how it continues to impact average citizens and regular home buyers, as well as fueling the continuing opioid crisis across the US and Canada, which has claimed tens of thousands of lives across North America, including nearly 4,000 Canadians in 2017 alone. The figures are so stunning that what is “known” years after the story first came to light could merely be the tip of the iceberg. 

The study published by Canada’s Global News begins by painting a disturbing scenario that suggests some of Vancouver’s priciest homes are nothing more than a new “Swiss bank account” of sorts providing the promise of an anonymous store of value and retaining the cash equivalent value of the original capital outflow from initial criminal transactions overseen for Chinese crime syndicates — all the while fueling Metro Vancouver’s housing affordability crisis.

The ultimate end result of the sophisticated and massive money laundering scheme is that middle-class families have been priced out of the city, per the report:

The stately $17-million mansion owned by a suspected fentanyl importer is at the end of a gated driveway on one of the priciest streets in Shaughnessy, Vancouver’s most exclusive neighborhood.

A block away is a $22-million gabled manor that police have linked to a high-stakes gambler and property developer with suspected ties to the Chinese police services.

Both mansions appear on a list of more than $1-billion worth of Vancouver-area property transactions in 2016 that a confidential police intelligence study has linked to Chinese organized crime.

https://www.zerohedge.com/sites/default/files/inline-images/Vancouver%20properties.jpg?itok=CDpjoivaNine Vancouver properties subject of a prior Globe and Mail investigation linking them to fentanyl laundering. Via The Globe and Mail

Previous investigations had quoted concerned residents describing that: “Vancouver seems to be evolving from a residential city into almost like a lockbox for money… but I have to live among the empty houses. I’m a resident, not just an investor.”

The snapshot that the new police study provides is based on analysis of a sample of about 1,200 high-end sales in 2016. Investigators cross-referenced databases of criminal records and confidential police intelligence with those high-end property records, which revealed the shocking 10% organized crime ties figure. 

But the implications for prior years going all the way back to the early 2000’s and even into the 1990’s, when Canadian police believe the current kingpins of fentanyl  which is the powerful and extremely addictive narcotic added to heroin to increase its potency (said to be 100 times more potent than morphine)  began to dominate Canada’s heroin markets, are equally as startling.

For starters, the report finds, fentanyl-related money laundering which funnels illicit funds through the luxury housing market has been so pervasive that researchers “didn’t have the time or resources to study the over 20,000 transactions”. During the course of these some 20,000 transactions home prices in Vancouver have tripled since 2005

From the new “Fentanyl: Making a Killing” extensive report

https://www.zerohedge.com/sites/default/files/inline-images/Vancouver%20Fentanyl%20crisis%20report.jpg?itok=-QljNhJV

And further illustrating just how extensive the whole scheme remains, there is this bombshell section from the report:

While the study only looked at property purchases in 2016, an analysis by Global News suggests the same extended crime network may have laundered about $5-billion in Vancouver-area homes since 2012.

At the centre of the money laundering ring is a powerful China-based gang called the Big Circle Boys. Its top level “kingpins” are the international drug traffickers who are profiting most from Canada’s deadly fentanyl crisis.

The crime network, according to police intelligence sources, is a fluid coalition of hundreds of wealthy criminals in Metro Vancouver, including gangsters, industrialists, financial fugitives and corrupt officials from China.

The report is so full of specific examples of multi-tens of million dollar homes that are actually money laundering conduits for fentanyl drug kingpins that it puts President Trump’s recent accusations against China for fueling the opioid crisis into fresh perspective.

At that time Trump attempted to lay out the case that Chinese suppliers had been fueling America’s opioid crisis, saying in part “It is outrageous that Poisonous Synthetic Heroin Fentanyl comes pouring into the U.S. Postal System from China.”

However judging by breadth and depth of figures merely from one major North American city (some American cities have been named in other investigations), it appears that Trump’s words actually understated the role of China and Chinese organized crime, of which it appears Beijing authorities have long been only too happy to look the other way while it takes deep roots on the American continent. 

After all we can’t imagine China’s all-pervasive advanced surveillance systems and powerful domestic intelligence apparatus could miss this: “Police say that almost every drug seizure they now make in Vancouver turns up some form of synthetic opioid produced at factories in China,” according to the report.

Source: ZeroHedge

***

Fentanyl kings in Canada allegedly linked to powerful Chinese gang, the Big Circle Boys

 

 

U.S. Mint Runs Out Of Silver Eagle Bullion Coins Following Demand Spike

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Recent downturns in gold prices and silver prices have spurred a dramatic increase in both old and new bullion buyers snapping up physical precious metals at perceived low valuations.

For many decades now, the US Mint American Silver Eagle coin has remained the #1 choice for most physical silver bullion buyers worldwide.

In terms of annual sales volumes and total US dollars sold versus other silver bullion government mint and private mint competitors, the 1 oz American Silver Eagle coin is still the most highly purchased form of silver bullion worldwide (find updated US Mint sales data here).

Not surprising, with this recent downturn in precious metal prices, available silver bullion inventories are beginning to sell out and back order.

We foresaw and wrote about this shrinking silver bullion supply situation coming a weeks ago in SD Bullion’s new research blog.

Thus today, the following communication issued by the US Mint’s Branch Chief was not surprising to us:

Date: Wed, 5 Sep 2018

Subject: 2018 American Eagle Silver Bullion Coins Temporarily Sold Out

This is to inform you that due to recent increased demand, the United States Mint has temporarily sold out of its inventories of 2018 American Eagle Silver Bullion Coins.

All orders received prior to this communication shall be honored and settled according to pre-agreed upon value date arrangements.

The United States Mint is in the process of producing additional 2018 American Eagle Silver Bullion Coins. We will make these coins available for sale shortly.

Please let me know if you have any additional questions.

Jack A. Szczerban

Branch Chief, Bullion Directorate

United States Mint

Of course this latest US Mint sell out only pertains to Silver Eagle coins.

US Mint American Gold Eagle coin supplies still stand at reasonable, albeit recently lightened levels.

For seasoned bullion buyers, this latest sell out of US Mint 1 oz American Silver Eagle Coins is not a new phenomenon.

We have seen this happen in various years past, including periods of bullion product rationing, sell outs, etc.

What is different this time around is the low Silver Eagle coin volumes being sold by the US Mint month on month, compared to somewhat recent years of 2009 through 2016.

See below,

https://www.silverdoctors.com/wp-content/uploads/2018/09/US-Mint-silver-eagle-coin-sale-sellout-Silver-Doctors.png

It appears like much of our industry, perhaps the US Mint has cut down on staffing, even silver planchet inventory levels, and other resources required to meet this latest spike in silver bullion product demand.

Typical to past US Mint silver sell outs and coin rationings, product and price premiums usually also increase in order to meet the silver bullion supply demand equilibrium. Smart bullion dealers are not going to sell out of their shrinking inventories without a reasonable profit to match. 

You can see various 1 oz American Silver Eagle coin premium price over spot spikes in the following chart below.

https://www.silverdoctors.com/wp-content/uploads/2018/09/US-Mint-silver-eagle-sellout-coin-premiums-Silver-Doctors.png

The price premiums spike coincide with the fall 2008 fiasco where virtually any and all bullion dealers ran out of bullion inventories, the early 2013 allocation rationing, and the middle 2015 sell out and order shut down.

Historically price premium spikes for American Silver Eagles tend to flow into other silver bullion product premiums. In other words, if the price premiums for Silver Eagles pops higher, you can expect various price increases and sellouts in competing silver bullion products to also ensue.

US Mint American Eagle Bullion Program 2010 Amendment

Yet even most industry onlookers and bullion buyers do not know that a small change to US law was made in 2010. It allows the Secretary of the US Treasury by fiat, and not outright public demand per say, to alone determine what quantities of American Silver Eagle coin supplies are sufficient to meet ongoing demand.

Pre 2010 amendment and law change:

(e)Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand,

Post 2010 law change:

(e)Notwithstanding any other provision of law, the Secretary shall mint and issue, in qualities and quantities that the Secretary determines are sufficient to meet public demand,

We do not expect the recent sell out of Silver Eagle coins to the be the highest priority of Secretary of the Treasury at the moment.

Bullion buyers should expect further silver bullion supply constraints both currently and ahead, especially if silver spot prices dip into the $13 or $12 oz zone some respected technical analysts have been calling for weeks / months in advance.

The following US Mint Silver Eagle coin annual sales chart encompassed the entire history of the US Mint American Eagle Bullion Coin Program. As you can see, the 2008 global financial crisis took the program to another level entirely.

https://www.silverdoctors.com/wp-content/uploads/2018/09/US-Mint-Silver-Eagle-sellout-annual-silver-eagle-coin-sales-1986-2018-Silver-Doctors.png

Even 10 years after the greatest financial crisis started, the worst since the 1929 depression, there are still both new and an already established base of silver bullion buyers who continue to aggressively buy silver bullion on spot price dips.

This recent US Mint sell out is just one example of that fact.

The following US Mint tour video was cut in 2014, but it’s still applicable to the way in which the American Silver Eagle coins are produced today. The only real difference is that the US Mint is currently selling less than ½ the volume it was then, yet still having issues meeting demand spikes in the short term.

More than likely the US Mint is currently dealing with a shortfall of silver planchets on hand.

The silver used in the program does not have to be mined in the USA as that law too was amended many years back. The US Mint does use silver coin planchet suppliers from Australia as well as domestic suppliers like the Sunshine Mint.

In terms of silver bullion on hand, don’t expect the Secretary of the US Treasury to have any available as they rely on private silver planchet suppliers and ‘just in time’ delivery for their program.

As most bullion buyers know, en masse the US government figuratively sold silver out in 1964.

The fact that the US government’s often clunky silver bullion coin program remains the largest in the world, illustrates just how tiny the silver bullion industry remains in the grand scope of global finance and economic financialization.

Sneaky law amendments aside, it does not take much silver bullion demand to break the industry’s small supply demand equilibrium.

Source: by James Anderson | SilverDoctors.com

 

Disaster Is Inevitable When America’s Stock Market Bubble Bursts – Smart Money Is Focused On Trade

(Forbes) Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings. Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008. In this report, I will show a wide variety of charts that prove how unsustainable the current bull market is.

Since the Great Recession low in March 2009, the S&P 500 stock index has gained over 300%, taking it nearly 80% higher than its 2007 peak:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2Fsp500-2-3.jpg

The small cap Russell 2000 index and the tech-heavy Nasdaq Composite Index are up even more than the S&P 500 since 2009 – nearly 400% and 500% respectively:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2Fpercentincrease-1.jpg

The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates. As I explained in a Forbes piece last week, ultra-low interest rates help to create bubbles in the following ways:

  • Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
  • By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
  • By discouraging the holding of cash in the bank versus speculating in riskier asset markets
  • By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
  • By encouraging more borrowing by consumers, businesses, and governments

The chart below shows how U.S. interest rates (the Fed Funds Rate, 10-Year Treasury yields, and Aaa corporate bond yields) have remained at record low levels for a record period of time since the Great Recession:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FUSRates-2.jpg

U.S. monetary policy has been incredibly loose since the Great Recession, which can be seen in the chart of real interest rates (the Fed Funds Rate minus the inflation rate). The mid-2000s housing bubble and the current “Everything Bubble” both formed during periods of negative real interest rates. (Note: “Everything Bubble” is a term that I’ve coined to describe a dangerous bubble that has been inflating in a wide variety of countries, industries, and assets – please visit my website to learn more.)

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FRealFedFundsRate.jpg

The Taylor Rule is a model created by economist John Taylor to help estimate the best level for central bank-set interest rates such as the Fed Funds Rate. If the Fed Funds Rate is much lower than the Taylor Rule model (this signifies loose monetary conditions), there is a high risk of inflation and the formation of bubbles. If the Fed Funds Rate is much higher than the Taylor Rule model, however, there is a risk that tight monetary policy will stifle the economy.

Comparing the Fed Funds Rate to the Taylor Rule model is helpful for visually gauging how loose or tight U.S. monetary conditions are:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FTaylorRule1-1.jpg

Subtracting the Taylor Rule model from the Fed Funds Rate quantifies how loose (when the difference is negative), tight (when the difference is positive), or neutral U.S. monetary policy is:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FTaylorRule2-1-1.jpg

Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding non-financial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles. (Read my recent U.S. corporate debt bubble report to learn more).

U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble. The chart below shows how share buybacks and dividends paid increased dramatically since 2009:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2Fbuybacks-1.jpg

Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) has helped to inflate the U.S. stock market bubble since 2009: quantitative easing or QE. When executing QE policy, the Federal Reserve creates new money “out of thin air” (in digital form) and uses it to buy Treasury bonds or other assets, which pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect: it causes stock prices to surge (because low rates boost stocks), as the chart below shows:

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FFedBalanceSheetvsSP500-2.jpg

As touched upon earlier, low interest rates encourage stock speculators to borrow money from their brokers in the form of margin loans. These speculators then ride the bull market higher while letting the leverage from the margin loans boost their returns. This strategy can be highly profitable – until the market turns and amplifies their losses, that is.

There is a general tendency for speculators to use margin most aggressively just before the market’s peak, and the current bull market/bubble appears to be no exception. During the dot-com bubble and housing bubble stock market cycles, margin debt peaked at roughly 2.75% of GDP. In the current stock market bubble, however, margin debt is nearly at 3% of GDP, which is quite concerning. The heavy use of margin at the end of a long bull market exacerbates the eventual downturn because traders are forced to sell their shares to avoid or satisfy margin calls.

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FSP500vsMarginGDP.jpg

In the latter days of a bull market or bubble, retail investors are typically the most aggressively positioned in stocks. Sadly, these small investors tend to be wrong at the most important market turning points. Retail investors currently have the highest allocation to stocks (blue line) and the lowest cash holdings (orange line) since the Dot-com bubble, which is a worrisome sign. These same investors were the most cautious in 2002/2003 and 2009, which was the start of two powerful bull markets.

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2Fallocation.jpg

The chart below shows the CBOE Volatility Index (VIX), which is considered to be a “fear gauge” of U.S. stock investors. The VIX stayed very low during the housing bubble era and it has been acting similarly for the past eight years as the “Everything Bubble” inflated. During both bubbles, the VIX stayed low because the Fed backstopped the financial markets and economy with its aggressive monetary policies (this is known as the “Fed Put“).

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2FVIX-1.jpg

The next chart shows the St. Louis Fed Financial Stress Index, which is a barometer for the level of stress in the U.S. financial system. It goes without saying that less stress is better, but only to a point – when the index remains at extremely low levels due to the backstopping of the financial markets by the Fed, it can be indicative of the formation of a dangerous bubble. Ironically, when that bubble bursts, financial stress spikes. Periods of very low financial stress foreshadow periods of very high financial stress – the calm before the financial storm, basically. The Financial Stress Index remained at extremely low levels during the housing bubble era and is following the same pattern during the “Everything Bubble.”

https://thumbor.forbes.com/thumbor/960x0/https%3A%2F%2Fblogs-images.forbes.com%2Fjessecolombo%2Ffiles%2F2018%2F08%2Ffinancialstress-1.jpg

High-yield (or “junk”) bond spreads are another barometer of investor fear or complacency. When high-yield bond spreads stay at very low levels in a central bank-manipulated environment like ours, it often indicates that a dangerous bubble is forming (it indicates complacency). The high-yield spread was unusually low during the dot-com bubble and housing bubble, and is following the same pattern during the current “Everything Bubble.”

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In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression:

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Tobin’s Q ratio (the total U.S. stock market value divided by the total replacement cost of assets) is another broad market valuation measure that confirms that the stock market is overvalued like it was at prior generational peaks:

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The fact that the S&P 500’s dividend yield is at such low levels is more evidence that the market is overvalued (high market valuations lead to low dividend yields and vice versa). Though dividend payout ratios have been declining over time in addition, that is certainly not the only reason why dividend yields are so low, contrary to popular belief. Extremely high market valuations are the other rarely discussed reason why yields are so low.

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The chart below shows U.S. after tax corporate profits as a percentage of the gross national product (GNP), which is a measure of how profitable American corporations are. Thanks to ultra-cheap credit, asset bubbles, and financial engineering, U.S. corporations have been much more profitable since the early-2000s than they have been for most of the 20th century (9% vs. the 6.6% average since 1947).

Unfortunately, U.S. corporate profitability is likely to revert to the mean because unusually high corporate profit margins are typically unsustainable, as economist Milton Friedman explained. The eventual mean reversion of U.S. corporate profitability will hurt the earnings of public corporations, which is very worrisome considering how overpriced stocks are relative to earnings.

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During stock market bubbles, the overall market tends to be led by a smaller group of high-performing “story stocks” that capture the investing public’s attention, make early investors rich, and light the fires of greed and envy in practically everyone else. During the late-1990s dot-com bubble, the “story stocks” were tech stocks like Amazon.com, Intel, Cisco, eBay, etc. During the housing bubble era, it was home builder stocks like Hovanian, D.R. Horton, Lennar, mortgage lenders, and alternative energy companies like First Solar, to name a few examples.

In the current stock market bubble, the market is being led by a group of stocks nicknamed FAANG, which is an acronym for Facebook, Apple, Amazon, Netflix, and Google (now known as Alphabet Inc.). The chart below compares the performance of the FAANG stocks to the S&P 500 during the bull market that began in March 2009. Though the S&P 500 has risen over 300%, the FAANGs put the broad market index to shame: Apple is up over 1,000%, Amazon has surged more than 2,000%, and Netflix has rocketed over 6,000%.

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After so many years of strong and consistent performance, many investors now view the FAANGs as “can’t lose” stocks that will keep going “up, up, up!” as a function of time. Unfortunately, this is a dangerous line of thinking that has ruined countless investors in prior bubbles. Today’s FAANG phenomenon is very similar to the Nifty Fifty group of high-performing blue-chip stocks during the 1960s and early-1970s bull market. The Nifty Fifty were seen as “one decision” stocks (the only decision necessary was to buy) because investors thought they would keep rising virtually forever.

Investors tend to become most bullish and heavily invested in leading stocks such as the FAANGs or Nifty Fifty right before the market cycle turns. When the leading stocks finally fall during a bear market, they usually fall very hard, as Nifty Fifty investors experienced in the 1973-1974 bear market. The eventual unwinding of the FAANG stock boom/bubble is going to burn many investors, including institutional investors who have gorged on these stocks in recent years. 

How The Stock Market Bubble Will Pop

To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions. The Federal Reserve inflated the stock market bubble via its record low Fed Funds Rate and quantitative easing programs, and the central bank is now raising interest rates and reversing its QE programs by shrinking its balance sheet. What the Fed giveth, the Fed taketh away.

The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.

I’m from the same school of thought as billionaire fund manager Jeff Gundlach, who believes that the Fed will keep hiking interest rates until “something breaks.” In the last economic cycle from roughly 2002 to 2007, it was the subprime mortgage industry that broke first, and in the current cycle, I believe that corporate bonds are likely to break first, which would then spill over into the U.S. stock market (please read my corporate debt bubble report in Forbes to learn more).

The Fed Funds Rate chart below shows how the last two recessions and bubble bursts occurred after rate hike cycles; a repeat performance is likely once rates are hiked high enough. Because of the record debt burden in the U.S., interest rates do not have to rise nearly as high as in prior cycles to cause a recession or financial crisis this time around. In addition to raising interest rates, the Fed is now conducting its quantitative tightening (QT) policy that shrinks its balance sheet by $40 billion per month, which will eventually contribute to the popping of the stock market bubble.

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The 10-Year/2-Year U.S. Treasury bond spread is a helpful tool for determining how close a recession likely is. This spread is an extremely accurate indicator, having warned about every U.S. recession in the past half-century, including the Great Recession. When the spread is between 0% and 1%, it is in the “recession warning zone” because it signifies that the economic cycle is maturing and that a recession is likely just a few years away. When the spread drops below 0% (this is known as an inverted yield curve), a recession is likely to occur within the next year or so. 

As the chart below shows, the 10-Year/2-Year U.S. Treasury bond spread is already deep into the “Warning Zone” and heading toward the “Recession Zone” at an alarming rate – not exactly a comforting thought considering how overvalued and inflated the U.S. stock market is, not to mention how indebted the U.S. economy is.

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Although I err conservative/libertarian politically, I do not believe that President Trump can prevent the ultimate popping of the U.S. stock market bubble and “Everything Bubble.” One of the reasons why is that this bubble is truly global and the U.S. President has no control over the economies of China, Australia, Canada, etc. The popping of a massive global bubble outside of the U.S. is enough to create a bear market and recession within the U.S.

Also, as the charts in this report show, our stock market bubble was inflating years before Trump became president. I believe that this bubble was slated to crash to regardless of who became president – it could have been Hillary Clinton, Bernie Sanders, or Marco Rubio. Even Donald Trump called the stock market a “big, fat, ugly bubble” right before the election. Concerningly, even though the stock market bubble is approximately 30% larger than when Trump warned about it, Trump is no longer calling it a “bubble,” and is actually praising it each time it hits another record.

Many optimists expect President Trump’s tax reform plan to result in a powerful boom that creates millions of new jobs and supercharges economic growth, which would help the stock market grow into its lofty valuations. Unfortunately, this thinking is not grounded in reality or math. As my boss Lance Roberts explained, “there will be no economic boom” (Part 1Part 2) because our economy is too debt-laden to grow the way it did back in the 1980s during the Reagan Boom or at other times during the 20th century.

As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won’t take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.

The purpose of this report is to warn society of the path that we are on and the risks that we are facing. I am not necessarily calling the market’s top right here and right now. I am fully aware that this stock market bubble can continue inflating to even more extreme heights before it pops. I warn about bubbles as an activist, but I approach tactical investing in a slightly different manner (because shorting or selling too early leads to under performance, etc.). As a professional investor, I believe in following the market’s trend instead of fighting it – even if I’m skeptical of the underlying forces that are driving it. Of course, when that trend fundamentally changes, that’s when I believe in shifting to an even more cautious and conservative stance for our clients and myself.

Source: by Jesse Colombo | Forbes

Learn about Trumps latest moves on trade negotiations with Canada and Mexico…

Starter Homes Are Most Expensive Since Just Before The Last Housing Crash

There is a simple reason why the US housing market is headed for its “broadest slowdown in years“: prices for housing are just too high, a new report suggests. Which is odd considering the conventionally accepted narrative that “rising prices are better for everybody.”

According to a new report from the National Association of Realtors, prices for starter homes are the highest they have been since 2008, just prior to the collapse of the housing market, and when Ben Bernanke infamously said that there is no housing bubble and that “we’ve never had a decline in house prices on a nationwide basis” and therefore we’ll never have one. The housing market suffered its worst crash on record shortly after.

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In the second quarter, first time buyers needed 23% of their income in order to afford a typical entry-level home; this was up from 21% in the year prior, and the highest in the past decade.

This, of course, should surprise nobody as price gains in the housing market have long outpaced wages; in fact in most markets the average home price increase is double the growth in hourly earnings.

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Now, with the housing market starting to show signs of cooling off, those bearing the brunt of the increases are buyers at the low-end of the market and in areas where supplies are the tightest. This has probably not been helped along by the volatile cost of commodities like lumber which have been impacted by Canadian tariffs, among others.

On top of that, rising interest rates are making mortgage prohibitively expensive for a broad section of the population.

“When prices go up at the entry level, that’s where the affordability issue is most acute,” Wells Fargo economist Charles Dougherty told Bloomberg. “People are hesitant to stretch the amount they’re willing to pay.”

The most expensive markets in the United States were San Francisco and New York City, where Bloomberg reported that the median household needed 65% of its income to buy a house in the second quarter of this year. Similar statistics followed in Los Angeles and Miami, where those numbers were 59% and 55%, respectively.

Perhaps a better way of saying this is that no mere mortal can actually afford to buy there, and the only buyers are members of the 0.01% or those who have an extremely generous mortgage lender.

None of this housing information is discussed at length by the FOMC or the government, which find no problem with a near record number of people getting priced out of the market. Nobody will be surprised when, as prices continue to rise, we are “surprised” by the next housing crisis.

This news comes just days after we reported layoffs taking place at Wells Fargo as a result of the slumping housing market and slower mortgage applications, as a result of collapsing mortgage loan demand. Last Friday, Wells Fargo announced it was cutting 638 mortgage employees as the nation’s largest home lender is hit by a crippling slowdown in the business.

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“After carefully evaluating market conditions and consumer needs, we are reducing to better align with current volumes,” Wells Fargo spokesman Tom Goyda said in an emailed statement according to Bloomberg.

As we reported back in March that the “Bank Sector Is In Peril As Refi Activity Crashes Amid Rising Rates” and as interest rates have continued to rise, Wells Fargo has been contending with the end of a refinancing boom that helped push profits to a record.

Source: ZeroHedge