Housing Doldrums Continue

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.

housingsstrtar.png

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.

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Approaching the Point of No Return?

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.

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Back to Fundamentals

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.

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Economic Policy Uncertainty and Global Equities

By Callum Thomas

It seems over the past few years the only certainty has been rising uncertainty, and the folk at Economic Policy Uncertainty have a set of indexes which map this trend out well.  Their indicators use algorithms to generate readings based on the flow of news.  As the charts below show, there are some important trends in these indicators, and a couple of key linkages with global equities and global stock market volatility.

The key highlights on global economic policy uncertainty are:

-The trend of the past decade has been for rising economic policy uncertainty.

-The peaks and troughs of policy uncertainty tend to line up with the swings and cycles in global equities, for a few good reasons.

-The spike in volatility is consistent with the rise in the economic policy uncertainty index, and the global equity market correction – and is a possible contrarian signal.

1. Global Economic Policy Uncertainty Trend: The first stop is to remark on the overall trend in global economic policy uncertainty, which has been on an almost consistent upward path.  Aside from the broad trend there are clear spikes and troughs in the indicator, and visually this tends to map to the swings and cycles in global equities. Like clockwork, the indicator has made a particular surge in the October readings, which lines up with the heightened market volatility we’ve encountered.  This makes sense both from the point of view that greater policy uncertainty is bad for markets, and bad market conditions also feed-back to foster policy uncertainty.

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M1 Money Multiplier FINALLY Exceeds 1.0

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.

m1m111418

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

MBS and the Core

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.

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Wages and Salaries Jump By 3.1%, Highest Level Since 2008

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.

wagesyea!

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

Bond Bull Bull

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.”

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“Whatever They Want” Coming Home to Roost

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.

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Gold Stocks Will Benefit From Cyclical Change

By NFTRH

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.

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Brinkmanship

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.

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