The Beach Boys sang it best: Shutdown!
The Dow Jones Industrial Average has risen 12.8% since The Federal government’s partial shutdown starting just before Christmas 2018. But since December 26th (the day after Christmas), the Dow has shot up 12.8%. And the S&P500 volatility index, the VIX, has declined by 50%.
Its fun, fun, fun for investors. But for nonessential Federal employees, Don’t Worry, Baby because you will receive back pay as soon as the shutdown is over.
Meanwhile, “Help Us Nancy and Chuck” and end the shutdown.
There is a lot of fear and uncertainty in financial markets: the US Federal government shutdown, May’s Brexit defeat, trade anxiety with China, postponement of Nancy Pelosi’s entourage 7-day excursion to Brussels, Egypt, and Afghanistan, the Mexican border wall, etc.
But given all the fear and uncertainty in financial markets, the VIX 1-year implied volatility has actually been declining … and its decline coincides with The Fed’s Quantitative Frightening (QF) or the shrinking of The Fed’s balance sheet.
Quantitative frighening or numbness?
China’s central bank, the People’s Bank Of China, now has the world’s largest balance sheet topping even the European Central Bank (ECB). Only The Federal Reserve is shrinking its balance sheet … for now.
The PBOC has injected almost $1.1 trillion in the market over the past two days.
One of the impacts of the balance sheet expansion and repo injections is a reduction in the volatiilty of Chinese stocks. Better known as “numbing volatility.”
On the sovereign side, China’s yield and swaps curves are kinked.
Central bank interfernce in markets seem to be never ending.
Global uncertainites abound. And with them, the US TReasury yield curve, the US Dollar Swaps curve, and the 1-month LIBOR curves are all kinked.
These curves are kinked all day and all the night.
The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.
And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.
Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.
Shrimp on the barbie, mate?
Mortgage applications increased 13.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 11, 2019.
.The Refinance Index increased 19 percent from the previous week to its highest level since March 2018. The seasonally adjusted Purchase Index increased 9 percent from one week earlier to its highest level since April 2010. The unadjusted Purchase Index increased 43 percent compared with the previous week and was 11 percent higher than the same week one year ago.
You can see the spike in refi apps coinciding with a decline in 30-year mortgage rates.
And you can see an even large spike in mortgage purchase applications with the decline in mortgage interest rates.
Fannie Mae’s 30Y current coupon rate has declined and is lower than it has been for most of 2018.
For the first time since the New York Federal Reserve began its monthly Survey of Consumer Expectations more than five years ago, respondents see parity between short-term home-price growth and overall inflation. U.S. housing-market expectations one-year ahead worsened for the sixth straight month in December, edging down 0.05 point to a median 3 percent, while that for inflation remained about unchanged at 3 percent. The bank’s internet-based survey uses a rotating panel of approximately 1,300 household heads.
Typically, a company with negative free cash flow indicates an inability to generate enough cash to support the business. Free cash flow tracks the cash a company has left over after meeting its operating expense.
But when 58% of the United States stockss have negative free cash flows … we got trouble in River City.
But Canada is even worse at 82%.
Ain’t this a kick in the head!
The US Framing Lumber Composite Index for December collapse. No, it isn’t just a seasonal effect since it hasn’t been happening in recent years. Just in 2018.
The decline is coinding with a general economic slowdown, although the various Fed Nowcasts are still above 2%.
Even Nicolas Cage knows it is slowing.