T-2, Judgement Day! US 2-Year Treasury Yields Up >120 Basis Points Just Since September 2017!

Investors should place close attention to the 2-year Treasury note. It has risen OVER 120 basis points just since September 2017.


3mo LIBOR and T-2 yield keep rising with The Fed’s “normalization.”


Here is a photo of the Fed’s Open Market Committee (FOMC) in action!


US Treasury 10Y Yield Pierces 3% Barrier, 30Y Mortgage Rates at 4.5% (Mortgage Refi Applications Deader Than A Norwegian Blue)

Finally, the US Treasury 10-year yield has pierced the 3% barrier and NOT immediately dropped back. The 10-year yield stands at 3.03%.


How about the 30-year mortgage average? The Bankrate 30Y mortgage average rate is now 4.50%.


Mortgage refinancing applications? They are deader than Monty Python’s Norwegian Blue Parrot. 


Mortgage lenders in terms of refinancing applications are pining for the fjords.


That’s Volatility! Dow Tanks 500 Pts on Catepillar Growth Concerns (Thanks IMF!)

That’s volatility! 

The IMF is reporting a bumpy road ahead for the global economy. 

Catepillar started the day with optimism,  then crashed with a “good as it gets” comment.

Caterpillar Inc. began the day euphorically, with shares rallying as the machinery giant beat earnings estimates and raised its own forecast. That all changed when management signaled the first quarter might be as good as it gets.


Catepillar’s EPS had been exploding, until the “as good as it gets” moment.


The Dow? Down 500 pts.



Case-Shiller Home Prices Surge At Fastest Pace (6.34% YoY) Since 2014 [Still Over 2x Hourly Earnings Growth]

Yes, The Federal Reserve is removing its excessive monetary stimulus at a sloth-like pace.


And home price growth is actually accelerating with the February Case-Shiller HPI growing at 6.34% YoY.


Home price growth is still growing a greater than 2x hourly earnings growth and has been since 2012.


Seattle, San Francisco and Las Vegas continue to lead the nation in YoY home price growth. Bringing up the rear are Chicago and Washington DC.csfed

18 of 20 metro areas in the US saw home prices grow at a higher pace, while 16 of 20 major U.S. cities experienced home price growth of 5.4% or higher, double the average wage growth.  And yes, Washington DC also has the slowest wage growth of the 20 cities in the Case-Shiller index.

Case Shiller feb 2018_0

As long as The Fed is slow (to normalize), you count on home prices to grow over 2x earnings growth.


Rising Mortgage Rates (4.47%) and Rising Entry-level Home Prices (+9%) Makes Housing Even MORE Unaffordable

Freddie Mac reported on Thursday that its weekly average 30-year fixed mortgage rate rose to 4.47%, the highest since January 2014. Unfortunately, home prices have risen since January 2014 as well.


And home prices are growing at a rate of three times that of average hourly earnings for most workers.


But what about entry-level housing? John Burns Consulting has a nice study on entry-level housing rising at a national average rate of 9%.

Monthly-housing-costs-entry-level-Mar2018 (1).png

And as Selma Hepp reported, there were 30% fewer homes below $1M available for sale in Q1 in LA and greater Burbank/Glendale/Sherman Oaks areas inventory below $1M dropped by almost 50% (almost 1,000 fewer homes!)


Of course, Washington DC is the slowest growing MSA in the nation (and it STILL feels expensive!).

What is tragic about rising home prices, particularly for entry level housing? The tragedy is that the Federal government devotes (or distorts) significant resources towards “affordable housing” that isn’t even affordable! Plus we have the Federal Reserve’s low interest rate policies that have created asset bubbles and local counties that have restrictive land (zoning) laws that choke-off new supply.

Well, at least the San Francisco Bay area only rose by 14%!

Here is a video of Federal housing policy leading to affordable housing.


The Pension Boogie: Global Pension Deficit $400 Trillion By 2050 (5X Today’s Entire Global Economy)

The World Economic Forum said in a study that the pension deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.

The big offenders in the pension boogie are 1) the United States and 2) China.


So what is the boogie? The boogie is that governments continue to promise exorbitant pension payouts while collecting a fraction of the money from contributors.

The State of California is an example of the pension boogie. California’s public employee pension systems have immense gaps – called “unfunded liabilities” – between what they have in assets and what they will need to meet their obligations to retirees. 

A half-dozen Los Angeles police and firefighters received pension payouts of $1 million or more in 2016 — two reaching $1.4 million, according to Transparent California, a watchdog database listing individual state and local government employee salaries and pensions.

Well, SOMEONE has to pay those ludicrous pension payouts. Including communities that are now required to contribute MORE to pensions.

So while political pundits point the finger about Trump’s trillion dollar Federal deficits (conveniently forgetting about Obama’s 4 years of trillion dollar deficits), most ignore the larger bomb on the horizon: public pensions.

At least Social Security caps their payout to recipients.


Time to do “The Pension Boogie.”

Good News! St Louis Fed ENI Q1 Real GDP Growth Projected To Be 3.50%! (But Yield Curve Signals “Winter is Coming!”)

St. Louis Fed Economic News Index, their real GDP “nowcast,” projects Q1 growth at 3.50 percent, up from its previous week’s projection of 3.36 percent.


As former Fed Chair Ben Bernanke said in Sintra, Portugal, last year, the current aging economic cycle “appears to have room to run.”

Yes, the Treasury yield curve flattening verifies that the economy has “room to run.” The 10Y-2Y spread (or curve slope) is narrowing like it did in 2005, two years prior to The Great Recession (that started in Q4 2017) according to the National Bureau of Economic Research (NBER).


So while the US economy is growing at a 3.50% clip, the yield curve is forecasting an end  to what Bernanke called “the aging economic cycle.” That is, winter is coming.



Ned Stark (Sean Bean) is dead. The new ruler?



Housing Finance Reform: A Better Way (Mutalization of Risk Among Investors, Just Not The Federal Government)

There exists multiple proposals to ‘reform’ the US housing finance system. Most involve making a Federal government guarantee explicit. Fannie Mae and Freddie Mac did NOT have an explicit guarantee back in 2008, yet were still put into conservatorship by FHFA. So the term “implicit guarantee” simply means an “explicit guarantee” that hasn’t happened out.

We have no idea what will happen when FHFA Director Mel Watt’s term expires in December. Will the next FHFA Director take Fannie and Freddie out of conservatorship and put them back in the market? Or will the new FHFA Director run with the status quo (aka, permanent conservatorship)? Or will there finally get movement towards actual housing finance reform?

A typical housing finance proposal is the one by Jim Parrott, Lewis Ranieri, Gene Sperling, Mark M. Zandi and Barry Zigas entitled “A More Promising Road to GSE Reform: Access and Affordability.”  Like other housing reform proposals, it is just the same thing wrapped in different color paper. Essentially they want to shut down Fannie Mae and Freddie Mac and open a government insurance corporation. This will require an explicit guarantee at taxpayer expense. Of course.

a_more_promising_road_to_gse_reform_access_and_affordability_2 (1)

While it’s somewhat unclear how they will do what they propose, it reminds me a bit of the Options Clearing Corporation (OCC). The OCC clears all listed US equity and index options. It is owned by the options exchanges but capitalized by the clearing members (banks and broker/dealers), who also post risk-based margin on behalf of their customers. Default risk is mutualized among the members. While a few large firms dominate the risk (e.g., BAML, Goldman, Morgan Stanley), these same large members are posting the largest amount of risk-based margin and default-fund capital.

Mutualizing the risk of the GSEs is the key, just as is mutualizing the risk of the members of a central counterparty. I think the CCP model could work well for the GSEs and the lenders. No Federal guarantee, the lenders must eat the losses on what they produce.

Mutualization of Risk’ refers to dividing up the costs associated with risks and financial losses among several investors, businesses, organizations or people. Mutualizing risk lowers the overall potential for significant financial loss to any one entity.

Just leave the Federal government out of it.