Cato’s Mark Calabria Likely Nominee To Replace Mel Watt As FHFA Director (What Would Mark Do?)

Mark Calabria, VP Mike Pence’s Chief Economist (formerly at the Cato Institute) is rumored to be the nominee of President Trump to replace Mel Watt as chief Fannie Mae and  Freddie Mac’s regulator (as well as other GSEs).

Calabria has long been an advocate of downsizing government’s role in the housing and mortgage market and even shutting down Fannie and Freddie.

What are the options that Calabria (and Congress) face?

  1. Status qou – leave Fannie and Freddie in conservatorship
  2. Remove FF from conservatorship and …

Free Fannie and Freddie? Not without a boat load of capital. Remember, FF are not depository institutions (unless Congress does what it did with investment banks during the financial crisis and allow them to be declared depository institions). A change to their charters and the acquisition of a current depository institution like United Bank would do the trick. FF would then be subject to bank captial requirement (which they currently are not).

Shut FF down. While appealing to free marketeers, various stakeholders like the affordable housing lobby will protest.

Of course, the old shut down FF and create a new government insurance company (aside from the fact that FHA, Fannie and Freddie are mono-line insurance ompanies already) is always on the table.  This was the Parrot and Zandi plan.

According to Parrot and Zandi, “With a new director at the FHFA next year, we are likely to see a meaningful shift in the role of Fannie Mae and Freddie Mac. This likely means a reduction of both the GSEs’ footprint and the cross-subsidy they provide, and it may also mean an attempt to get the GSEs out from under the government’s wing altogether. If
it is any of these, it will mean higher mortgage rates, less access to credit, and disruption to the housing and mortgage markets and broader economy.”

I once estimated that it would increase mortgage rates by 30 basis points only. Heck, The Federal Reserve can achieve that at their next meeting!

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I am guessing that Calabria will take it slow as to not scare markets.

 

The Heat Is … Off! FHFA Home Prices YoY, Smart Money Flow Index Slow With Fed Unwinding

As the late Glenn Frey almost sang, The Heat Is Off.

As The Fed unwinds its $4+ trillion balance sheet, the Smart Money Flow Index and the FHFA Purchase Only Home Price Index YoY are declining.

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In other words, the housing asset bubble is Already Gone.

I wonder if it is time for Fed Chair Jerome Powell to emulate Frank Booth from “Blue Velvet” and take another hit of oxygen.

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Breaking Bad! Pound, Dow Get Pounded After UK PM May Delays Brexit Vote (UST 5Y-3Y Curve Inverts, 5Y Breakeven Inflation Rate Collapsing)

Its a wonderful day in the financial markets.  …. NOT. In fact, financial markets are breaking bad.

Where to begin?

U.S. equities extended a sell-off and the pound tumbled as traders took a grim view of the outlook for global growth and trade after UK Prime Minister Theresa May delayed a crucial Brexit vote.

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Meanwhile, the Great Britain Pound got pounded.

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And the 5Y – 3Y Treasury curve inverted.

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And the US Breakeven 5 Year Inflation Rate is collapsing.

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Yes, financial markets are breaking bad.

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Monsters In The Gelatin! Fed’s QE Unwind Reaches $364 Billion As Fed Funds Rate Continues To Climb (Volatility Express!)

Since the beginning of the QE unwind — or “balance sheet normalization,” as the Fed calls it — in October 2017, the Fed has now shed $364 billion.

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Of course, The Fed still have a long way to go to unwind its $4 trillion balance sheet. But The Fed is, at the same time, raising its target rate (although through confusing messaging).

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The S&P 500 index and the NAREIT All Equity (Real Estate Investment Trust) indices are soaring along nicely with The Fed’s balance sheet expansion (aka, low interest rates), but are experiencing rather dramatic volatiity in the face of a shrinking balance sheet and rising Fed target rate.

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And yes, volatility is increasing with Fed unwind and target rate increases.

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SMART Money Flow Index? The decline coincides with The Fed’s unwinding on its Treasury positions.

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Bubble you ask? Instead of “bubble” or “collapse,” the Fed uses “valuation pressures” and “broad adjustment in prices.”

To quote the late, great Isaac Hayes from Reindeer Games, “There are monsters in the gelatin!!”

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Leveraged Loan Funds Heading For The Exit (Bloom Is Off The Rose For Corporate Subprime)

Yes, the bloom is off the rose for another “subprime” debt product, this time leveraged loans and leveraged loan funds.

Leveraged loan is debt from companies with below investment grade credit ratings. Leveraged loans are typically secured with a lien on the company’s assets and are generally senior to the company’s other debt.

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Rising interest rates and an excessive amount of corporate debt outstanding aren’t helping.

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Fed Gov Brainard Sees Gradual Fed Hikes Still Appropriate in ‘Near Term’

Despite gloom on the housing front, declining core inflation and a volatile (and declining) stock market, Fed Gov Lael Brainless still wants to keep raising interest rates.

(Bloomberg) — Federal Reserve Governor Lael Brainard said U.S. economic momentum is strong and a gradual approach to interest-rate increases remains appropriate for now.

“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded,’’ Brainard said Friday at a conference at the Peterson Institute for International Economics in Washington. “That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”

Party on, Lael. Party on Jerome.

 

 

 

Fed Changes Course … Again To “Wait And See” Strategy As Dow Continues To Tank (UMich Buying Conditions For Housing Lowest Since 2008)

The Dow is falling again. This time on the less-than-awesome jobs report. 155k jobs added versus the expected 198k jobs added.

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Resulting in a decline to the Dow.

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Yesterday, the Dow sell-off eased after The Wall Street Journal reported that the Federal Reserve is considering breaking with its current approach of steady interest rate hikes, favoring a wait-and-see approach. That was relief to investors worried that the Fed might raise interest rates too fast, which could choke off economic growth.

And the the University of Michigan Buying Conditions for Houses fell to it lowest level since December 2008. Although the might be Michigan getting destroyed by Ohio State 62-39.

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In other words, The Fed is signalling “Hard to starboard!!!”

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Crypto Market Crash Is Causing Startups to Shutter Operations (As Paris Burns)

As Paris continues to burn after French Prime Minister Macrony tried to raise fuel taxes in an attempt to curb greenhouse gas emissions,

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the cryptocurrency market continues to see its bubble continue to burst.

(Bloomberg) — The plunge in the cryptocurrency market is weighing on the software-development community that spawned over 1,000 digital coins amid dreams of independence from traditional financial systems and instant wealth.

ETCDEV, the startup that led development on Ethereum Classic, which is among the top 20 coins with a market capitalization of about $400 million, announced this week that it’s shuttering operations due to a funding crunch. ConsenSys, one of the largest crypto-related software startups based in New York, said it’s planning a reorganization.

Many of the companies are suffering because they kept a portion of their funds in digital assets, whether in tokens they sold through initial coin offerings or in Bitcoin and Ether, which served as the preferred means of exchange in the crypto world. As prices collapsed this year by more than 90 percent in some cases, and their so-called digital wallets thinned out, many developers found they couldn’t raise additional funding.

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So, are Paris and cryptocurrencies burning? Yes!

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Sea of Red: Global Sell-off Continues As Dow Sheds 600 Points (Bond Yields Down, Commodities Down, Gold UP)

As of 11am EST, global equity markets are a sea of red.

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The Dow is down 600 points (2.4%) while the EU is down around 3%.

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After the big sell-off on Tuesday, we often see a rally the next day. But not today. It is a continuation of the trade tensions between the US, China and other trading partners.

And nervous investors are pulling out of equites and jumping into the safe zone (sovereign debt) pushing prices up and yields down.

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Even commodities are taking a beating as well … except gold.

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Calling The Fed, ECB, BOJ, PBOC!

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Venezuelaization: Chicago Levies PlayStation Tax To Pay For Bankrupt Municipal Pension System And Massive Deficits

Chicago IL (should be ILL) is the poster child for an insane pension program (mostly to municipal workers and public school teachers). But not only in the city of Chicago, but the state of ILLinois as well.

Consider that the unfunded liability in the state’s combined retirement systems has risen in 11 of the state’s past 12 years—despite a roaring stock market, despite a steady increase in contributions that now amount to a stunning $8 billion or so a year, and despite passage several years ago of a plan that markedly reduces benefits for those hired after Jan. 1, 2011. Between 2004 and 2016 (the last year for which audited financials are available) unfunded liability quadrupled, to $123.8 billion, according to the Illinois Commission on Government Forecasting and Accountability, the Legislature’s financial watchdog unit.

Quadrupled!

So, how will Chicago ILL and the State of ILL pay for this pension morass? TAX ANYTHING THAT MOVES!!!!!!!

Chicago is one of the most heavily taxed cities in the country. In addition to holding the title for the highest sales tax nationwide, the city also levies additional taxes on bottled water and cell phones.

The amusement tax was actually passed several years ago and included almost all forms of entertainment. Whether residents are looking to spend an evening at the theater, see a concert, cheer on their favorite sports team, go to a nightclub, or even catch a movie, they are on the hook for an additional 5 percent tax.

The city has had to get creative when it comes to extorting money from its residents.

In 2015, the amusement tax was expanded as city officials realized they could bring in additional revenue with the creation of a “cloud tax.” Capitalizing on the popularity of streaming services, the city began instituting a 9 percent tax for using platforms like Netflix, Hulu, Spotify, and others. And thanks to the inclusion of the streaming services, the amusement tax now brings in about $12 million annually. It also applies to anyone whose billing address is within city limits.

The city of Chicago is currently operating on a $400 million deficit. It’s no wonder, then, that the city has had to get creative when it comes to extorting money from its residents. The amusement tax was created as a means of decreasing the deficit and aiding the city in paying for additional expenditures, which essentially means that Chicago dwellers are once again on the hook for the government’s poor decisions.

To make matters worse, Chicago is also a city with a horrible reputation for government corruption, and especially corruption within the local police force. When Democratic Mayor Rahm Emanuel approved the additional tax on streaming services, it was done so with the explicit purpose of helping to fund the $530 million increase given to Chicago’s police force. However, even with the increased funding, Chicago law enforcement has still been unable, or unwilling, to combat the city’s skyrocketing crime rates.

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According to a new report by Moody’s Investors Service, Illinois’ unfunded pension liabilities equaled 601 percent of state revenues in 2017, a U.S. record!!

And now PlayStation begins collecting amusement tax from Chicago users.

Nicolas Maduro: “I approve of Chicago’s message!”

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