By Anthony B. Sanders
1 Unit Housing Starts Down 1.82% MoM (-2.6% YoY), But 5+ Unit Starts Up 6.19% MoM In October
Yes, the housing market nationally remains in the doldrums.
1-unit detached housing starts in October declined 1.82% (and -2.6% YoY). But 5+ multifamily starts rebounded 6.19% MoM.
Rising costs and interest rates combined with the relative disappearance of subprime borrowers has led to a slowing in both single-unit and multifamily starts.
Continue reading Housing Doldrums Continue
By Jeffrey Snider
At the end of June, the crude curve really got out of hand. WTI futures had returned to backwardation many months before, and then the eurodollar/collateral explosion May 29 sapped some crude strength. Over the following month, curve backwardation would become extreme as the benchmark price seemed ready to skyrocket.
After getting up near $80 a barrel, the price reversed. During the several weeks of weakness, the futures curve remained in steep backwardation – the expectation that the recovery (narrative) would continue whatever any short-term profit taking.
But as prices did rebound through September, there was already trouble underlying. The curve was changing shape, flattening out even beyond normalizing that pretty ridiculous backwardation spike late June/early July.
Continue reading Approaching the Point of No Return?
By Doug Noland
The Dow (DJIA) jumped 545 points (2.1%) in Wednesday’s post-midterms trading. The S&P500’s 2.1% rise was overshadowed by the Nasdaq Comp’s 2.6% and the Nasdaq100’s 3.1% advances. Healthcare stocks surged, with the S&P500 Healthcare Index up 2.9% (Healthcare Supplies index jumping 4.5%). Led by Amazon’s 6.9% (113 points!) surge, the S&P Internet Retail Index gained 6.1%. From October 29th trading lows to Thursday’s highs, the S&P500 rallied 8.1% and the Nasdaq100 jumped 9.6%.
The post-election bullish battle cry was a resolute “back to fundamentals!” With the market surging, analysts were proclaiming “reduced uncertainty” and “the best possible outcome for the markets.” The President and Nancy Pelosi both adopted restrained tones and spoke of efforts to cooperate on important bipartisan legislation. Prospects for a market-pleasing infrastructure spending bill have improved. What’s more, a positive spin was put on the return of Washington gridlock. Less Treasury issuance would support lower market yields generally, ensuring the U.S. economic expansion maintains ample room to run. The weaker post-election dollar was said to be constructive for global liquidity.
The EEM emerging market ETF rose 1.9% Wednesday, pushing the rally from October 29th lows to 11.0%. The South African rand and Indonesian rupiah gained 1.5%, as most EM currencies temporarily benefited from the weaker dollar.
Continue reading Back to Fundamentals
By Anthony B. Sanders
As Banks Reduce Their Excessive Reserves
It has been an agonizing 10 years since the housing bubble collapse and the financial crisis, not mention a surge in banking regulations such as Dodd-Frank and the creation of the Consumer Financial Protection Bureau.
But 10 years after, the M1 Money Multiplier has FINALLY broken through the 1.0 barrier.
The M1 Multiplier means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1), as is evident from the figure below. So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves, but that amount is finally starting to comedown so that the M1 Money Multiplier has finally broken the 1.0 barrier.
Continue reading M1 Money Multiplier FINALLY Exceeds 1.0
By Doug Noland
The Dow (DJIA) traded as low as 24,122 in late-Monday afternoon trading. By Friday’s open, the Dow had rallied 1,457 points, or 6.0%, to 25,579. Relatively speaking, the Dow was a tame kitten. From Monday’s intraday lows, the Nasdaq100 rallied as much at 7.8%. The Semiconductors won this week’s Wild Animal competition, rallying 12.7% (week’s lows to highs). At 11.9%, the Biotechs were a close second. The Homebuilders (XHB) rallied as much as 11.3% before ending the week with a gain of 7.3%.
A couple obvious questions come to mind: Bear market rally or just another “buy the dip, don’t be one” opportunity for a market again ready to scale new heights? Is President Trump now ready to strike a trade deal with China – or was he just goosing markets ahead of the midterms?
Let’s start with the markets. They certainly had the likeness of a classic “rip your face off” bear market rally. The Goldman Sachs Most Short index surged 9.0% off Monday lows. For the week, this index rose 6.1%, showing off a 2.5 beta versus the S&P500’s return (6.1%/2.4%). In the semiconductor space, heavily shorted On Semiconductor, NXP Semiconductor, AMD and Micron Technology gained 23.9%, 18.5%, 14.8% and 13.9%, respectively. A long list of heavily shorted retail stocks gained double-digits, as the Retail index (XRT) surged 4.3% for the week.
Continue reading MBS and the Core
By Anthony B. Sanders
Dow Jumps >300 Pts After Announcement
One of the most closely watched economic indicators by the Federal Reserve is the Employment Cost Index generated by the US Bureau of Labor Statistics.
Private industry wages and salarie rose 3.1% YoY in September, the highest since 2008.
And not surprisingly, the biggest increase in benefits (also 3.1% YoY) is for … State and Local Government workers. Apparently, they don’t believe that there is a public pension fund crisis … or don’t care.
Continue reading Wages and Salaries Jump By 3.1%, Highest Level Since 2008
By Jeffrey Snider
On February 12, 1999, the Bank of Japan announced that it was going full zero. Japan’s central bank would from that day forward push the overnight uncollateralized lending (interbank) rate to the zero lower bound. Further, it pledged to keep it there until Japan’s economy recovered.
The economic slump in the nineties had been by 1999 almost a decade in length. As the Japanese economy ground to a halt, unmovable and completely resistant to being restarted by any of the orthodox techniques tried up to that point, there came to be an institutional bid for government paper. It was the perfect illustration of Milton Friedman’s interest rate fallacy – low interest rates signal tight money in the real economy. The bid was pure liquidity risk, having nothing to do with the “fundamentals” of bonds.
ZIRP was intended to try and change that condition. The mere rumors about it all the way back in 1998 had kicked off a BOND ROUT!!! From September 1998 through February 1999, it seemed as if the so-called bond bull market had finally been broken. Central bankers would ride to the economy’s rescue with non-standard “accommodation.”
Continue reading Bond Bull Bull
By Doug Noland
Let’s begin with global. China’s yuan (CNY) traded to 6.9644 to the dollar in early-Friday trading, almost matching the low (vs. dollar) from December 2016 (6.9649). CNY is basically trading at lows going back to 2008 – and has neared the key psychological 7.0 level. CNY rallied in late-Friday trading to close the week at 6.9435. From Bloomberg (Tian Chen): “Three traders said at least one big Chinese bank sold the dollar, triggering stop-losses.” Earlier, a PBOC governor “told a briefing that the central bank would continue taking measures to stabilize sentiment. ‘We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other. I think we both have vivid memories of the past.'”
The PBOC eventually won that 2016 skirmish with the CNY “shorts”. In general, however, you don’t want your central bank feeling compelled to do battle against the markets. It’s no sign of strength. For “developing” central banks, in particular, it has too often in the past proved a perilous proposition. Threats and actions are taken, and a lot can ride on the market’s response. In a brewing confrontation, the market will test the central bank. If the central bank’s response appears ineffective, markets will instinctively pounce.
Continue reading “Whatever They Want” Coming Home to Roost
As we have noted over the many years of the gold sector’s bear market, the gold miners will not rally for real until the real sector and macro fundamentals come into place. Those fundamentals do not include commonly promoted inflation, China/India “love” trades, a US dollar collapse or especially, war, pestilence or any other human misery than economic. The more astute gold bugs do not fall for that.
The gold miners are counter-cyclical as they leverage gold’s performance (whether positive or negative) relative to cyclical assets and markets. Hence the handy picture showing the key fundamental items with the 4 largest planets orbiting the golden sun being the most important.
So the 3 Amigos (of the macro) were saddled up last year in order to guide us to the point of macro change. Linked here is the most recent update from October 19. In this post let’s look at just one macro fundamental indicator among several important macro and sector fundamentals; the ratio of gold to developed stock markets.
Continue reading Gold Stocks Will Benefit From Cyclical Change
By Kevin Muir
This morning my twitter-pal Boris Schlossberg from @FxFlow (and a must-follow btw) sent me the following message:
Boris, funny you should message me that comment as we were just putting the finishing touches on an old chart that I dug up from my database.
Continue reading America is Not an Economic Island
By Trey Reik
[biiwii comment: very pleased to welcome Trey, a senior portfolio manager at Sprott, to our group of quality authors]
Over our two decades following global monetary affairs, we have often marveled at default confidence awarded the Federal Reserve. Don’t misinterpret us — the Fed’s power borders on surreal. Seven governors and twelve regional bank presidents set the price of money not only for the world’s largest economy, but through auspices of the dollar standard system, for the entire globe. No matter how practical “don’t fight the Fed” logic has proven over time, it does not diminish the folly that 19 capable and well-supported individuals might possibly price the world’s reserve currency more efficiently than free markets.
Record valuations for U.S. financial assets have inured investors to the daunting risks of unwinding eight years of QE and ZIRP. Because such radical monetary policy has never before been deployed, our 19 monetary mandarins, by definition, command no special insight into broad implications of Fed policy normalization. Into this unprecedented monetary vortex steps new Fed Chairman Jerome Powell, a seemingly low-key and forthright communicator bent on rational steps to normalize Fed policy. In this report, we share our perspective that the Fed’s dual policy agenda of simultaneous rate hikes and balance sheet reduction, rather than constituting some sort of scientifically-formulated policy elixir, amounts to little more than glorified brinkmanship — the Fed’s signature policy tool. Events of the past few weeks only serve to support our contention that Fed tightening is pinching global liquidity to a degree which threatens reigning valuations of traditional financial assets.
Continue reading Brinkmanship