Rollercoaster! Dow Down Again, SMART Money Index Likely To Keep Falling

Market rollercoast?

The Dow (DJIA) is down over 400 points of 11:45am EST. The S&P 500 index is also down. The VIX is up.


As The Fed continues to unwind its balance sheet, the SMART Money Flow Index is likely to keep deflating.


It looks like The Fed is sticking to its unwinding plans for their balance sheet, as are global central banks.



France Exacerbates Euro-Area Slowdown as China Weakness Mounts

Yes, there is a global economic slowdown underway, led by Europe and China.

(Bloomberg) — The euro-area economy is closing out 2018 on a gloomy note, echoing a trend of weaker global growth from China to the U.S.

A gauge of manufacturing and services in the euro region unexpectedly dropped to its lowest in just over four years in December. While the drop was driven mainly by France where the “Yellow Vests” movement led to a contraction, there’s also signs that underlying momentum is dropping off.


But political turmoil alone can’t account for the weakness that has characterized the euro-area economy since early this year, with trade tensions posing a headwind to investments across the globe. In China, figures on Friday showed slowing production growth and retail sales.


Only Macron would increase taxes on fuel as the French economy is slowing. The reaction in France was pretty clear.


What’s the matter Macron? Chicken?

macron chicken.jpg

Are Housing Prices Really Schrödinger’s House Cat? We Won’t Know Until The Fed Stops Manipulating Risks And Prices (Home Flipping Has Stalled)

Schrödinger’s cat is a (hopefully) unperformed experiment in quantum physics.


Schrodinger’s Equation For A Single Particle In Three Dimensions (Simplified)

We don’t know if the cat in question is dead (due to poisoning) or alive or DEAD AND ALIVE … UNTIL we open the box.

Just like housing prices. We won’t know if housing prices are dead until The Federal Reserve stops pumping accelerant into the housing box.

If we look at the spread between major housing markets (Case-Shiller 20 Metro YoY) and a broader index (FHFA’s Purchase-only Home Price Index YoY), you can see that the major market “bubble” ceased when The Fed stopped QE3.


Another sign is the decline in houses begin flipped YoY.


Since The Fed seemingly is pumping accelerant into the housing market, we can only guess as to the status of Schrödinger’s House Cat.



SMART Money Flow Index Lowest Since 1995 As Fed Continue Balance Sheet Unwind And QE3 Vanishes (And Like That, Its Gone)

The SMART Money Flow Index has just declined to its lowest level since 1995 as The Fed’s QE3 vanishes into the sunset.


The Smart Money Flow Index is  calculated according to a special formula by taking the action of the Dow in two time periods: the first 30 minutes and the last hour. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts.

As Keyser Soze said, And just like that, its gone.

Hello Taxpayers! Fed’s Balance Sheet Suffered Substantial Losses In Q3 (Record $66.453 Billion)

Hello Taxpayers!

According to the Fed’s latest quarterly financial report, The Fed’s massive portfolio suffered substantial losses when hit a record $66.453 billion in the third quarter.

Fed P&L dec 2018

Of course, as the balance sheet shrinks, that equates to money being withdrawn from the economy.


House Prices As An Example Of Fed Risk Mispricing (Shiller’s The Housing Boom Is Already Gigantic. How Long Can It Last?)

Yale economist and Nobel Laureate Robert Shiller wrote an interesting op-ed in the New York Times entitled “The Housing Boom Is Already Gigantic. How Long Can It Last?”

That’s what she said.

Bill McBride at Calculated Risk already opined on some of the odder aspects of Shiller’s op-ed. So, I am going to focus on a different angle about the gigantic boom in housing prices and how can it can last.

Let’s look at the spread between YoY home prices using the Case-Shiller 20 metro home price index over the Case-Shiller National home price index (includes smaller metro areas). You can see that the CS 20 index spread over the CS National index ballooned during The Fed’ third round of quantitative easing (asset purchases). It slowed dramatically once The Fed stopped QE and is now falling that The Fed is unwinding its balance sheet.


Another spread is between the CS 20 metro YoY and FHFA’s Purchase-only Index YoY. This chart shows that the spread actually became negative after The Fed stopped QE.


The CS 20 Metro index heavily weighs coastal cities like Los Angeles, San Francisco, Seatlle, Boston, etc. The CS National and FHFA PO indices include interior US metro areas like Kansas City. Or more rural areas like Show Low, Morenci, and Three Way Arizona.

Did The Fed help misprice risk assets like housing? Of course!


Core Inflation Rose Slightly To 2.2% YoY, Rent CPI Rises To 3.31% YoY (Zillow’s Rent Index Is At -0.07% YoY )

Core inflation rose slightly to 2.2% YoY from 2.1% in November.


While core CPI YoY rose slightly, core PCE prices YoY have been falling.


Rent CPI YoY rose to 3.31% YoY while Zillow’s rent index for all homes is at -0.07% YoY.


Real average weekly earnings YoY are down to 0.5% while real average hourly earnings are up to 0.8% YoY.


MBA: Mortgage Applications Increased in Latest Weekly Survey As Mortgage Rates Decline

Mortgage applications rose 1.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 7, 2018.

The Refinance Index increased 2 percent from the previous week. As mortgage rates dropped.


The seasonally adjusted Purchase Index increased 3 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 4 percent higher than the same week one year ago.


The Death of Fed Funds? As Market Dries Up, FOMC Asks What Next (Try Not Mispricing Risk??)

One the primary tools of monetary policy, the Fed Funds rate, is seeing the volume of Fed Funds drying up.

(Bloomberg) — The debate to replace the Federal Reserve’s key interest rate has begun.

Spurred by declining volumes and the dominance of a few participants in the market for fed funds, the central bank has started discussing potential alternative policy benchmarks as it seeks firmer control over the nation’s short-term interest rates.

While the deliberations have been largely overshadowed in recent weeks by speculation over a shift in the Fed’s tightening trajectory and the fate of its $4.1 trillion balance sheet, where they lead could have dramatic consequences for financial markets. Federal Open Market Committee members brought up two potential alternatives at last month’s meeting, and they could hardly be more different. What’s more, some strategists say a policy-targeting pivot could come as soon as next year.


But not to fear. The Fed’s QE program is shrinking, but has a long way to go. But it does seem the we have hit a break-point in the balance sheet and the 10-year yield.


Of course, The Fed coulds always CHARGE banks interest to park their excess reserves at The Fed instead of paying interest.


Here is The Fed trying to control the economy with their Fed Funds rate.


What will The Fed do to get back in the saddle again?

Gold Short Positions Decline As Gold Prices Rise And 10-Year Treasury Yields Head South Of The 3% Border

10-year Treasury yields are heading south of the 3% border.


And non commercial gold short positions are declining as gold prices rise and the 10-year Treasury yields head down Mexico way (that is, head south of the 3% border).

Here is a picture of Fed Chair Jerome Powell and former Fed Chair Janet Yellen dicussing interest rates.